When it comes to market volatility, how low is low?

Before 2017, a close below 10 in the Volatility Index (VIX) was an extremely a rare event. It had only happened 9 times since 1990 out of 6,804 trading days. This is equivalent to 1 day every 3 years, or 0.13% of the time.

A handful of days in late December 1993, one day in January 1994, twice in November 2006, once in December 2006 and one more time in January 2007. After that, it would be over 10 years until the VIX would once again find itself below 10.

Which brings us to 2017: the year volatility died.

In 2017 alone, the Volatility Index has closed below 10 on 32 separate occasions, or 16% of all days. In the table below of lowest VIX closes, the sea of yellow is all since May of this year.

In 2017, we have seen the following records in the VIX:

• the lowest intraday level in history (8.84 on 7/26/17),
• the lowest daily close (9.19 on 10/5/17),
• the lowest weekly close (9.36 on 7/17/17), and
• the lowest monthly close (9.51 on 9/29/17).

October is known as the most volatile month in markets.

Not this year. October 2017 is on pace to be the least volatile month in modern history (back to 1990).

Intraday volatility over the past month is also at a record low, with a 0.35% average range. Just 9 years ago, in October 2008, that same range was over 7% per day.

What does this tell us other than the obvious (volatility is extremely low)?

First, that records in markets are made to be broken. Just because you haven’t seen something before doesn’t mean it can’t happen. Given enough time, almost anything can and will happen. If you don’t believe me, see Exhibit A (negative interest rates across Europe)…

2017 also serves as a reminder that future is unknown. Nobody was predicting this to be the least volatile year in modern history. They were predicting just the opposite, in fact, even after the year had already begun…

I say modern history because if you go back in time there was actually one year with even lower volatility: 1964.

This is interesting given the hindsight narratives attempting to explain this year’s low volatility, including “high frequency trading” and the “passive/index boom.” Of course, neither of these were around circa 1964, making the explanations for today’s market harder to believe.

What was around, no different than today: bad news. In November 1963, J.F.K. was assassinated. In 1964, the Vietnam War escalated after authorization by Congress (Gulf of Tonkin Resolution), with 23,000 American troops by year-end (in 1965 this would jump to 184,000). It was also the year of the 1964 Civil Rights Act, with associated violence and riots.

Like 2017, any and all bad news was ignored by the markets in 1964. Why? Nobody truly knows. The markets are driven by psychology more than anything else, and the mass psychology at the time was that of a bull market (1962 – 1966). Which is to say that good news was bought and bad news was not sold, again and again in a powerful positive feedback loop.

Such sentiment doesn’t last forever, of course, as psychology is always changing. Volatility would eventually rise back then just as it will inevitably rise this time around. We just don’t know when it will happen or why it will happen. It could happen tomorrow or it could happen in two years – nobody really knows such things.

What we do know is that it’s probably not a good idea to assume that 2017 is a new paradigm, just as it was not a good idea in the midst of the financial crisis to assume every year would look like 2008. Taking undue risk today is no better than hiding money under your mattress after 2008. Reactionary portfolio management would be just fine if the future always looked like the recent past. But that’s not the way it works in markets, where each time is different. And the more extreme the present environment, the more different the future will seem.