2016 ended with the VIX index near its low for the year. The VIX index measures how large market fluctuations are predicted to be over the next month. It is often referred to as the fear index, as it tends to spike above 20 during times of market turmoil and remain in the low teens during calm market stretches (like the last eight weeks).
Just prior to the election, on November 4th, the VIX hit one of its highest levels of the year (see chart), with investors betting that after the election the market would struggle. This turned out to be quite wrong, with U.S. markets reacting very positively to the election results.
The U.K. Brexit vote at the end of June also sent the VIX index up sharply as the unexpected news of a yes vote to leave the European Union clouded Europe’s future. Those fears proved overdone and the VIX quickly dropped back down.
2016’s highest VIX levels came at the beginning of the year, as Chinese investors sold Chinese stocks with a passion and oil reached a low of $26 a barrel in February. A Chinese meltdown never materialized and investors started buying stocks and oil again with the VIX back into low territory by April.
Reviewing the data for the last decade, a spike in the VIX tends to happen at least once a year and sometimes for long stretches of time. Investors can use the VIX index as a tool to get a sense for general market sentiment.
Source: Bloomberg, Hefren-Tillotson. Data as of 1/3/2017. PAST PERFORMANCE DOES NOT PREDICT FUTURE RESULTS
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