The Russia-Ukraine conflict is now in its third week and markets remain volatile. The major U.S. equity benchmarks dropped about 10% from their peaks, with the exception of the Energy sector. The CBOE Volatility Index (VIX®), the so-called “fear gauge,” has been hovering above 30, which is the 90th percentile of its historical value. Its level on March 10, 2022, was more than two standard deviations above its one-year average. Although it remains unclear how long these geopolitical tensions will last and how much it will affect the global economy, the U.S. equity market has managed to avoid the VIX levels seen two years ago, which were triggered by pandemic-driven sell-offs.
More importantly, historical data show that the equity markets tend to bounce back quickly after elevated volatility. We look at all the trading days on which VIX hit above 30 and calculate the S&P 500® performance in the subsequent 6 months and 12 months. The scatter charts in Exhibit 2 show that the vast majority of these 557 days were followed by positive performance in the next 6 months (82%) and 12 months (88%).
We further compare the 6- and 12-month performance after these highly volatile days with rolling returns on all historical days. On average, the 12-month performance after VIX hit above 30 was two times higher than the 12-month rolling returns on any business day since Dec. 31, 1999. Similar results are reflected in the small-cap space (see Exhibit 3).
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