MW Wall Street's 'fear index' may be hitting new highs, but investors don't need to be scared
By Mark Hulbert
Stocks typically perform better in the wake of low, rather than high, VIX readings
A low VIX is something to celebrate, rather than fear.
I'm referring to the Cboe Volatility Index VIX - also known as the VIX - which recently fell to its lowest level of the year. Given that the VIX is often referred to as Wall Street's "fear index," it is ironic that so many traders fret about the VIX getting too low.
But fret they do. A recent example is a Barron's column complaining that Wall Street is "too quiet" and that the "stock market's calm won't last."
History teaches us that this concern is misplaced. Although the VIX may very well rise in coming weeks, if it does, it will be for reasons other than it being "too low" currently.
This is the implication of a study conducted by finance professors Alan Moreira of the University of Rochester and Tyler Muir of UCLA, titled "Volatility-Managed Portfolios." They found that, contrary to conventional Wall Street wisdom, the stock market on average actually performs better when the VIX is low than when it is high.
The professors don't deny that the VIX often rises as the market falls, and that the VIX typically hits its highest level at or near the market lows. To that extent, the conventional wisdom is right. But making money from that wisdom is another thing entirely. That's because only in retrospect can we know when the VIX will hit its high. Traders therefore can lose a lot of money betting that the VIX has hit its high, only to have it rise even further.
A classic illustration of this came in late 2008, in the depths of the global financial crisis. Until then, the VIX had never risen above the high 40s, and many traders considered any reading close to that level to be a mortgage-the-house-to-buy-stocks signal. But in the fall of 2008, the VIX easily punched through the high 40s on its way to an eventual high of close to 90. A trader who bought stocks when the VIX first hit its prior high lost nearly 40% before the stock market finally hit its bottom.
This is an extreme example, but it is consistent with the historical record, as you can see from the above table. The stock market's average subsequent-month return is higher when the VIX is in the lowest quartile of its distribution than in either of the second- or third-lowest quartiles. To be sure, the market has an even higher average return following highest-quartile readings - but the standard deviation of subsequent-month returns for that quartile is even greater. As a result, the return-to-volatility ratio - a simple measure of risk-adjusted performance - is highest for the lowest VIX readings.
The VIX in September
Traders also refer to seasonal tendencies for why we should expect the VIX to rise in coming weeks. And it is true that the stock market produces it worst average monthly return in September. That leads many to expect the VIX's average level in September to be higher than those of the other months.
That's not the case, however. As you can see from the accompanying chart, September's average VIX level, while high, is by no means the highest. That "honor" goes to October, while March is the runner-up. September's average VIX level is the third highest, only modestly above the all-month average.
The bottom line? The VIX may very well rise in coming weeks and months. But until it does, you should relax rather than worry.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
-Mark Hulbert
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August 28, 2025 15:09 ET (19:09 GMT)
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