The Chicago Board of Options Exchange’s Volatility Index (VIX) has been tracking the speed of stock price movements since 1990. In January, the index showed that volatility – or the fluctuation of share prices – jumped 34 percent.
This is the largest increase in VIX history and possibly indicates that investors are getting surprised and changing their investment decisions. NPR’s Marilyn Geewax joins Here & Now’s Jeremy Hobson to discuss “volatility” and what this increase says about the market in 2014.
JEREMY HOBSON, HOST:
This is HERE AND NOW from NPR and WBUR Boston. I'm Jeremy Hobson.
And we've been talking recently about the swings that have been happening in the stock market. There have been a lot of big ups and downs so far this year, thanks to trouble in emerging markets and poor corporate earnings. But why such volatility? Joining us now is Marilyn Geewax, senior business editor for NPR. Marilyn, welcome back.
MARILYN GEEWAX, BYLINE: Hi. Good to be with you.
HOBSON: So there's this index that tracks volatility. It's called the VIX. Can you first tell us a little bit more about what that is and what exactly it's saying right now?
GEEWAX: Right. This is a Volatility Index, and the purpose of it is to measure the speed of stock price movements. You don't want to just know if they're going up and down, but how fast is that happening? And that gives you a sense of whether or not people are feeling pretty jittery. Sometimes people call it the worry index or the fear gauge. It's sort of a measure of jitteriness or giddiness, depending on whether or not it's going up or down.
And what we saw last year, in 2013, the stock market was very non-volatile, let's say.
HOBSON: It was stable, you could say.
GEEWAX: Yeah, you know, stable, yeah. Every day, you'd come and the stock prices went up a little bit. And by the end of the year, they were up almost 30 percent. So it was a nice, quiet, historically low volatility period where everybody was pretty happy. And then you slam into January. All of a suddenly, we got a terrible report about jobs in December. They came in much lower than anyone had expected. Lots of other bad news about emerging markets, all the stuff you talked about. So the mood changed. All of a sudden, everybody went from steady, smooth, let's head up, to ouch, where's the exit? And the volatility increased dramatically. People were selling stocks so rapidly that, really, the price jobs were very large. So - and unfortunately, they were all on downside, it seems like.
HOBSON: Yeah. But - I mean, that is worth noting. It is - we started the year, what, around 16,500 on the Dow. And now, we're down to 15,500. It's fallen about a thousand points in all this volatility.
GEEWAX: And they are really big drops. On any given day you could have a - there have been something like seven triple-point losses on the Dow Jones Industrial Average, you know, in the last month. So that makes people nervous, and so this fear gauge seems to be higher. But, you know, we - you can also talk to some experts. And I was talking with an investment strategist this morning from Vanguard and he was saying, you know, volatility, it - yeah, it's terrible when it's on the downside. But there could be upside surprises.
It's entirely possible that Friday, for example, when we get the jobs report, maybe it'll come in stronger than people were expecting. I mean, there could be volatility. Suddenly, when everybody realizes, gosh, you know, maybe we just had a bad month. Let's get back on track. And then suddenly, prices start to pop back up again. So we're really in a situation where when you look at sort of the chart of where this is all going, you know, we've had a huge run-up in the past year. So - I mean, gosh, stocks are really way up from where they were.
If you have a selloff for a month, maybe this is just a routine correction down, about 7 percent maybe. And then we turn it back around, and we start heading back up. Or, you know, maybe this is the start of sort of a really significant - more than 10 percent correction and a bear market. At this point, everybody is trying to read the tea leaves, looking at what's happening. And they like looking at that Volatility Index because it's like one more leaf in the tea cup that they can read to see if what's the sentiment out there, what's the fear. So, you know
HOBSON: Well - and so many small investors are wondering what to do. And, of course, many of them, when the market collapsed back in 2008, 2009, sold all their stocks, missed the rebound and...
HOBSON: ...and they ended up in much worse shape.
GEEWAX: Well, that's what - they'll tell you, just look where we were five years ago, and the stock market is way up from then so...
HOBSON: Yeah. Marilyn Geewax, NPR senior business editor, thanks so much as always.
GEEWAX: Oh, you're welcome.
HOBSON: This is HERE AND NOW. Transcript provided by NPR, Copyright NPR.