Stock market volatility

Notwithstanding inherent volatility in the VIX during the focus period, the CBOE Volatility Index is forecast to drop at a compound annual rate of 2.7% over the five-year period through 2024-25, to an average daily unadjusted close value of 17.1 points during the year. This is due to a large spike in the base year during the COVID-19 outbreak. Volatility remains at high levels as a result of spiralling inflation, higher interest rates and geopolitical uncertainty sparking concern in markets.

However, assessing the trend prior to the global outbreak of the coronavirus, in 2013-14, the VIX sunk to its lowest average daily unadjusted close value (14.5 point) over a given financial year since 2006-07 (12.9 points). Twinned with the patience of the US Federal Reserve to maintain then loose monetary policy, an easing of post-financial crisis austerity measures amid, to a certain degree, global economic recovery spurred confidence among investors. However, subsequent concerns with regards to an indicative slowdown the Chinese economy, which in part fuelled a collapse in commodity prices - the price of crude oil in particular crashed and hit a nadir during 2016 - rocked sentiment among stock market investors. In turn, expectations of a negative impact on market capitalisation values of S&P 500 companies resulted in the average daily unadjusted closing value of the VIX increasing by 0.4% in 2014-15, and by a further 20.8% in 2015-16.

In 2016-17 through 2017-18, however, the average daily unadjusted closing value of the VIX rebounded, declining by 22.3% and 8.9% respectively, and on 3 November 2017, the VIX reached its lowest daily unadjusted closing value (9.1 points) of all time - in contrast, the highest daily unadjusted closing value the VIX has ever reached was on 22 November 2008 (80.9 points) as the economic downturn sent ripples through the stock market. The precipitous drop in the VIX over the two years through 2017-18, thus indicating a dampening of stock market volatility, was, in large part, due to buoyancy in the US labour market and lax monetary policy which, in turn, diminished investors' concerns with regards to corporate earnings. However, the inherently volatile nature of commodity prices, ongoing tension between the US and Mexico, and escalating trade wars with major US trade partners, particularly China by way of tariffs imposed by the Trump administration, have induced an air of uncertainty among share investors with regards to the short- to medium-term outlook for the S&P 500 and wider global stocks. Consequently, the average daily unadjusted close price of the VIX recorded a 31.7% upsurge in 2018-19.

The average daily unadjusted close price of the VIX increased by a further 16.1% in 2019-20, to reach approximately 19.1. This increase was heavily dictated towards the tail-end of the financial year whereby the global outbreak of the coronavirus skyrocketed the VIX over February 2020, but to a far greater extend in March 2020. Stock markets across the globe plummeted in March 2020, as investors feared that the spread of the coronavirus would significantly impede economic growth, sparking a domestic and global recession. Investors continued to react to a string of developments in regards to the coronavirus outbreak, which included the spread of coronavirus officially being declared as a global pandemic by the World Health Organization, entire country lockdowns, supply chain disruption, currency and commodity market fluctuations, reduced levels of business and consumer demand and significant travel restrictions imposed across the globe. All of which, point towards a period of lacklustre global economic prospects causing fear among investors, spurring the dumping of stocks. Consequently, during the final two weeks of the 2019-20 financial year, VIX remained historically high, not falling below 60 points. The average daily unadjusted close price of the VIX was 27.3 points in 2020-21, representing a 43.2% increase on the year prior, based on the ongoing fear among investors surrounding a global economic slowdown caused by the outbreak of the coronavirus.

The average daily unadjusted close price of the VIX declined by 26% in 2021-22, falling to approximately 20.2 points. This generally reduction in the level of stock market volatility was predominately as a result of the continued COVID-19 vaccine rollout across the globe. However, during the final month of the year through 31 March 2022, the market contended with some significant global headwinds which resulted in some weakness. These factors will be discussed within the outlook section.