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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is co-global head of investment strategy for JPMorgan Private Bank
It is sometimes called the market’s fear gauge but investors should take a positive cue when the CBOE Volatility index rises.
When the Vix rises above the key threshold of 30 — as it did most recently on March 30 — it indicates a degree of uncertainty in markets that might suggest reining in equity positions to some. A historical analysis signals just the opposite.
We have examined the 724 instances in which the Vix closed above the 30 mark over the past 30 years, excluding the two most recent instances. Investors who bought the S&P 500 when the Vix closed above 30 enjoyed positive returns 70 to 83 per cent of the time, with average gains of 12.4 per cent in six months.
The pattern is familiar to even a casual market observer. Fear overshoots, forced selling creates dislocations and prices subsequently rebound, mean-reverting.
That pattern has been reflected in recent moves in the Vix, a real-time measure of expected 30-day volatility in US equities calculated from options pricing.
After peaking at more than 31.65 on March 27 amid increased tensions between the US and Iran and worries over the future path of AI, it has since fallen back nearly a third to 20.14. While a recent sentiment survey of US investors showed they were the most bearish since the period post “liberation day” announcement of US tariffs last year, the S&P 500 has rallied about 7 per cent from the March 27 close.
What do we find when we examine prior episodes of the Vix over 30? The average returns are decidedly positive (2.4 per cent after one month, 6.6 per cent after three months and 12.4 per cent after six months). But those averages obscure a wide range of outcomes. The worst one-month return was minus 27.7 per cent, while the best was a positive 26.6 per cent. At six months, the range extends from a fall of 37.9 per cent to a rise of 52.7 per cent.
For an investor looking to buy the S&P 500 when the Vix exceeds 30, the time horizon makes a meaningful difference. In 509 of 724 instances we examined — 70 per cent of the time — investors saw a positive return at the one-month mark. At the three-month point, the percentage rises to 76 per cent, and at six months, it reaches 83 per cent. Once again, patience is rewarded — a market cliché that has the added advantage of also being true.
In the current market environment, technical signals appear consistent with prior episodes of the Vix over 30 that preceded recoveries. Market fundamentals look solid as well, assuming that the Middle East conflict eases within a reasonable timeframe and the supply shock to the economy proves to be contained. They are big “ifs” but we see a bright outlook for corporate profits.
The approaching first-quarter earnings season will serve as a test. Will top-line revenues reflect healthy consumer demand? Will companies’ forward guidance suggest that profit margins are coming under pressure? Consensus estimates project about 12 per cent S&P 500 EPS growth in the first quarter, which would mark the sixth consecutive quarter of double-digit earnings growth. That may prove optimistic, but we do think investors will broadly cheer first-quarter earnings results.
And stock valuations look attractive with a recent drop in price-earnings multiples to levels below those seen in the wake of “liberation day” and the five-year average. The multiple for the S&P 500, which is basically flat year to date, is 20.15 times below the one-year, three-year and five-year average.
Equity investors discount the future. As they worry more about growing risk, anticipating margin pressure and slowing economic momentum, they drive valuations lower well before earning growth actually declines. That’s why we often see price-earnings multiples trough on peak profits.
When investor worries prove unfounded — when the bad news does not happen — equity markets recalibrate. Typically they mean revert. Earnings confirm corporate resilience and forward multiples expand.
Market analysts speak of the equity risk premium for a reason. Buying equities is inherently risky and there is no “perfect” time to invest in the S&P 500.
But the data over 30 years sends a clear message: the odds overwhelmingly favour the buyer when the Vix is above 30. Expectations of volatility have calmed recently but investors should take note if uncertainty starts to pick up once more.
