Good Economic News for the Holidays: Volatility Is Down

One of the most important but underreported financial indicators is the CBOE’s Volatility Index (^VIX), which measures the market’s expectation of future volatility in stock prices. (The CBOE has written a nice technical white paper describing how it is calculated, here.) Traditionally, the annualized volatility of the S&P 500 has been 20 percent, but last month when I went to give a talk on retirement investment at Columbia, the VIX was standing at an apocalyptic 80 percent. The huge drop in stock prices is bad, but it would be a lot better if the market thought that the major gyrations were mostly in our past.

So the good news is that the volatility index has retreated to 45 percent:

Now, 45 percent is still more than twice what it “should” be. But it’s at least moving in the right direction. When it drops below 30 percent, it will be a strong indication that the market correction is complete and we’re back to business as usual. …