The Relationship: Volatility & 2 Indices.

We’re entering the 10th year of the stock market bull run. Equity valuations are arguably “over-priced”. The US economy is starting to show good strength, inducing the central bank to push the interest rate lever upwards. It is very likely that we will see several rate hikes in the ensuing periods of this year, but what could it mean for the US Dollar and S&P 500 index (representative of the US stock market)?

Let’s take a look at the chart below.

VIX_SPX_DXY.PNG

Source: Yahoo! Finance

The volatility of the S&P 500 (red) represented by VIX (blue) goes up when the S&P 500 sells off. This is most evident during the subprime crisis in 2008. Conversely, in an uptrending market, the VIX tends to be low. The VIX has been relatively sideways trending since 2012.

In essence, more panic exists in the market during a downtrend, thus resulting in higher volatility.

Let’s bring in another variable into the equation. More often than not, the Dollar Index (purple) is negatively correlated with the S&P 500 (red). The stock market has benefited from low interest rates since 2008, making huge rallies year after year. But if interest rates are going to be raised further this year as part of normalization, what is going to happen to US equities as well as volatility? It’ll be good to think about it!

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Till next week, have a good weekend!

Cheers,

Nigel Fernandez

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