Dog Days of Summer: Does the VIX Matter?

Can you believe it? We’re already more than halfway through the year! We’re also more than a month into the third quarter, and you know what that means: We’re officially in the dog days of summer.

August is historically one of the seasonally weakest months of the year for the stock market. Sam Stovall, the chief investment strategist at CFRA, recently pointed out that August has been the third-worst month in terms of returns and third-most volatile month for the S&P 500 since 1945.[1] With exceptions, of course, but based on recent market action, this August could very well be a rough one for Wall Street.

Consider this: Stovall noted that the S&P 500 is only positive in August 35% of the time after posting new highs in July. The S&P 500 climbed above the 4,400 level in July and set a new all-time high on July 26, but that’s not all. While historically, the S&P 500 has breached new all-time highs six or more times in July, the S&P 500 has dropped an average of 2.4% in August. The S&P 500 set six new all-time highs in July 2021 alone.

The latest spread of the COVID-19 Delta variant isn’t helping matters as we head into the weak month of August, either. Main Street and Wall Street are on edge, waiting to see if more mask mandates and restrictions are coming.

New York has already stated that restaurants and gyms will require proof of vaccination for entrance into facilities. Some companies have also delayed in-office work, while others like Microsoft (MSFT), Walmart (WMT), and Google (GOOG) are requiring proof of vaccination for employees to return to work. As you’d expect, the latest restrictions have ignited volatility in the aforementioned stocks as well as in many restaurant and gym stocks—and we’re only a week into August.

So, when you add it all up, it’s growing more likely that August could be a bumpy month for the stock market. Just how volatile the next few weeks will get is anyone’s guess, but the Chicago Board Options Exchange (CBOE) Volatility Index, or the VIX, can give us a little insight into what we could expect.

If you’re unfamiliar with the CBOE Volatility Index, it’s precisely what its name suggests: an index that measures the market’s volatility. How it calculates volatility can be a little complicated but, simply put, it reflects prices on S&P 500 options and measures the risk associated with these moves.

If the VIX is climbing higher, the market expects more volatility. On the flip side, the market expects a lower volatility environment if the VIX is dipping lower. Breaking it down further, a VIX reading of 12 or fewer projects that there will be a low level of volatility over the next 30 days, while a VIX reading of 20 or more signals that the market can expect a high level of volatility over the next 30 days.[2]

Look at the chart below. The VIX bottomed in early July and then continued to rise, setting higher lows through the end of the month. The VIX closed July with a reading of about 18, which is at the high end of the expected volatility range of 13-19.

It’s essential to understand the VIX is the current market’s prediction for the S&P 500’s volatility over the next 30 days. In today’s uncertain environment, poor economic data, rising COVID-19 Delta cases, or a similar unexpected event could impact the stock market and ignite higher levels of volatility.

Considering August is historically a bumpy month, and investors are already nervous with recent COVID-19 developments, it’s safe to say we’ll likely experience our fair share of volatility in the upcoming weeks. But just like we don’t recommend following the “sell in May” crowd to the exits in the Spring, we also don’t advise selling ahead of the August volatility.

Remember, long-term investors should always stick to their financial plan. The biggest mistake investors can make is tweaking their financial strategy based on “fear,” or what may or may not happen in the near term. A long-term investment strategy helps you weather the near-term bumps and achieve your financial goals in the long run.

Give us a call at Nicollet Investment Management today, and we’d be happy to help you develop a financial plan to weather any market volatility now and in the future.

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[1] https://fortune.com/2021/08/02/stock-market-august-bad-month-for-stocks-federal-reserve-tapering/

[2] https://www.bankrate.com/investing/vix-volatility-index/