Federal Reserve interest rate changes could incite greater swings in stocks and goad the CBOE Volatility Index, along with related exchange traded funds.
Jim Strugger of MKM Partners LLC argues that while the Fed rate hikes have not fueled volatility over the past two decades, the central bank’s decision this time around could be different, reports Michelle Davis for Bloomberg.
The short-term uncertainty is already have an effect on the market, with the VIX rising Wednesday. The iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) and the ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) rose a little over 1% Wednesday ahead of the Federal Open Meeting Committee’s announcement. [VIX ETP Traders Anticipate More Volatility Ahead]
The VIX, which measures the implied volatility on a range of options tied to the S&P 500 index, rose an average 24% in the following days in response to previous rate spikes. Strugger, though, pointed out that the swings were short lived during low-volatility periods for U.S. equities, except for one time.
“All else equal, transitioning monetary policy has not been inherently destabilizing for U.S. equities,” Strugger said. “But this has not been a typical economic expansion.”
Strugger believes the current six-year bull cycle most closely resembles the late-expansion rate increases that started in June 1999. After rates were increased in June 1999, the VIX surged as much as 35% to a 28.5 level in the following month-and-a-half period.
Since the December 2014 low, the VIX has jumped 32% and is 7.3% above its 12-month average, which suggests that equities are in for a period of greater volatility ahead.