Market Volatility

Chart of the Week for Sept 26, 2008 - Oct. 02, 2008

Expected volatility in the stock market, as measured by the Chicago Board of Options Exchange Volatility Index ("VIX"), has risen 45% from January 1, 2008 to September 23, 2008. Over the same time period, the S&P 500 Index has dropped 16%. Between August 22, 2008 and September 23, 2008, the VIX has moved up 78%. The VIX is a commonly used measure of the market's expectation of volatility risk over the next 30-day period. A high VIX level is generally associated with a period of increased volatility and uncertainty in the market, while a lower level corresponds to less volatility and stress in the market. The S&P 500 Index consists of 500 companies representing larger capitalization stocks traded in the U.S.

The chart above illustrates the VIX price level changes from January 1997 to September 23, 2008. There have been several periods of volatility from 1997 to present. In some instances spikes in the VIX have coincided with events such as the 1998 Russian debt default, the 9/11/01 terrorist attacks and most recently the U.S. subprime crisis and its effect on the overall U.S. economy. The current volatility has moved the VIX higher in a short period of time, but as of September 23rd the VIX remains at least 20% lower than the highs reached since 1997.

As investors cope with the most recent changes in volatility it is important to put volatility in perspective. Approximately 28% of the years between 1926 and 2007 had negative S&P 500 returns. However, every rolling 20-year period during the 82-year time frame, including the Great Depression, posted a positive return in the S&P 500 Index.

This illustration was compiled by information from outside sources. These companies are not affiliated with ICMA-RC. This information is being provided for educational purposes and is not intended to be construed as or relied upon as investment advice. ICMA-RC does not offer specific tax or legal advice. Individuals are advised to consider any new investment strategies carefully prior to implementing.

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