The Volatility (VIX) Index is very useful for gauging the mood of the market. 
It is colloquially known as the ‘Fear Index’ as it is very sensitive to heightened volatility which is about the best measure we have of investors’ perception of risk.
For the technically orientated, it measures the market’s expectation of 30 day volatility using the implied volatilities of a wide range of S&P 500 index options. Generally, a figure below 20 shows an element of relaxed complacency around the markets whereas a figure above 20 suggests elevated uncertainty.
It will come as no surprise that we have just come through a period of elevated volatility around the Brexit vote.
Performance of VIX in 2016
Source: FE Analytics
This started around 13 June and then unsurprisingly peaked on 24th June at around 26. It then fell back below 20 by 28th June and sits at 13 at the time of writing – all seemingly back to normal.
However, we all know that that is not quite the whole story.
The market has all the looks of an ostrich with its head in the sand, occasionally taking a look round and then burying it again.
Markets rise on good news; the result of the EU Referendum has not been hailed by anyone, not even the leave camp, as good news for the UK economy and businesses. They talk vaguely about ’it’ll be ok‘ but have no plan - yet none deny the hit the economy is going to take over the next 12 months or more.
What no-one knows is just how big a hit that will be. Yet the FTSE 100 is at 6,700 over 5 per cent higher than on the 23rd June.
Performance of index since Brexit vote
Source: FE Analytics
Whilst higher, it hides the significant polarisation in stock performance; house builders and banks have seen share prices fall over 20 per cent, pharmaceuticals and mining stocks have risen by 15 per cent to 20 per cent, a difference of up to 40 per cent in performance.
Those that have fallen are telling us a story about future expectations for returns and it’s not encouraging.
We mustn’t forget however that Brexit isn’t the only ‘game in town’ and economic data from both the US and China has been robust, so the attraction of overseas earners has got even more attractive for UK investors, especially when your currency has taken a pounding.
And then there’s the market favourite – more QE and the potential for lower interest rates.
The trouble is the only beneficiary over the last few years of quantitative easing has been real assets and the bond markets, not the underlying economies or their populations, unless they are investors.
This goes to the very nub of the problem, governments and central bankers have looked after the financial system, protecting those who should have lost their shirts, they haven’t looked after the economy.
Will a quarter point off interest rates make any real difference, I doubt it, money has never been cheaper and people don’t want to borrow. For some they need to save because interest rates are so low, for others low interest rates indicate that returns are going to be very poor, otherwise money would cost more.
But for now it looks like little is set to change from the policy makers who will continue to push on the proverbial QE string.
But don't be short of equities because they don’t look set for a tumble yet, but at some point there will be a dawning realisation that markets have been artificially ramped up and bear little reality to fundamentals. As for the VIX, it measures what’s happening, not the future; like any statistical calculation it can’t predict the future until it’s too late.
Guy Stephens is managing director at Rowan Dartington Signature. All the views expressed above are his own and should not be taken as investment advice.
