Heightened uncertainty about the global macro environment has led to a spike in the volatility index (VIX), which is commonly referred to as the fear index. The spiking VIX and the stock market sell off is at least partially attributable to the risk of a worst-case scenario in the Eurozone debt crisis.However, UBS equity strategist Jonathan Golub thinks that a worst-case scenario in Europe is unlikely as policymakers are likely to prevent or contain any fallout. As the uncertainty recedes, he thinks stocks will make a comeback.
Golub’s team did some research and showed how the VIX correlates to the S&P 500:
Using history as a guide, when investors gain greater clarity, volatility should fall, sending stock prices higher. Over the past 3 years, for every 51⁄2% change in the Vix, stocks moved 1% in the opposite direction. Applying this relationship, a fall in the Vix from 43 to 20 would correspond to a rise of roughly 10% in the S&P 500.
While many investors have preferred to sit on the sidelines until there is greater visibility on the macro environment, we believe that stocks are likely to rebound hard when that moment arises, making a tactical shift quite difficult.