What is the VIX, and should long-term investors care?

The VIX is calculated using S&P 500 index options and provides insight into how much volatility traders expect over the next month. In simple terms, a rising VIX signals uncertainty, while a declining VIX suggests confidence returning to the market.

For short-term traders and options strategists, the VIX is a crucial risk indicator. But for buy-and-hold investors, its importance is less direct. While volatility can create short-term market noise, long-term investors are typically more concerned with earnings growth, economic cycles, and asset allocation rather than month-to-month fluctuations in the VIX.

That being said, understanding the VIX can still be valuable. It can help investors recognize periods of excessive pessimism—when fear dominates markets—which can sometimes present long-term buying opportunities.

How does the current VIX compare to history?

While a VIX of 26.92 is elevated compared to its long-term average of around 19.5, it is far from historical extremes. Major financial crises have seen the VIX skyrocket to much higher levels:

• Black Monday (1987): the VIX did not exist at the time—it was officially introduced in 1993 by the CBOE. However, back-calculated estimates suggest that if the VIX had existed, it would have exceeded 150 during the crash.
• Dot-com bubble (2001): the VIX peaked above 40 as tech stocks collapsed.
• Global financial crisis (2008-2009): reached an all-time high of 89.5 in October 2008.
• COVID-19 market crash (March 2020): spiked to 85 as global markets panicked.

Comparing today’s volatility to these historic events helps put things into perspective. While uncertainty is rising, we are not currently in crisis territory.

Recent volatility trends

Even in the past year, we’ve seen similar short-term spikes in the VIX that later reversed:

• August 2024: the VIX surged above 65 due to an unwind of the yen carry trade but fell back below 20 within weeks.
• December 2024: the index jumped 74% after the Federal Reserve hinted at pausing rate cuts, only to retreat soon after.

Looking at the VIX chart, we see that volatility often spikes rapidly but rarely stays high for extended periods. The pattern of sharp increases followed by declines suggests that the VIX tends to overreact in the short term but mean-reverts over time.

Why is the VIX rising now?

The recent increase in the VIX can be attributed to several key factors:

1. Trump’s tariff threats: upcoming “reciprocal tariffs” set to be announced on April 2 have created uncertainty, with investors unsure about the economic impact.
2. Geopolitical risks: ongoing tensions between Russia and Ukraine continue to weigh on global sentiment.
3. Market liquidity issues: as more traders use zero-day options (0DTE), the VIX calculation has become more sensitive to short-term price swings, amplifying volatility spikes.

Despite these factors, it’s worth noting that volatility spikes often fade as clarity returns to the market.

How long will the VIX stay elevated?

A key characteristic of the VIX is that it is mean-reverting, meaning that after periods of extreme highs, it usually moves back toward its long-term average. Historically, the VIX does not remain elevated for long unless a major economic downturn is unfolding.

• The long-term average sits around 19.5.
• Readings above 30 often indicate heightened fear, but these levels rarely persist.
• Past volatility spikes—whether due to policy uncertainty, rate decisions, or geopolitical risks—have typically subsided once the market absorbs the new information.

Given these patterns, it’s reasonable to expect that unless new major risks emerge (!), the VIX will likely decline in the coming weeks or months.

What should investors do?

For long-term investors, short-term volatility is part of the investing process. While the VIX can signal uncertainty, it does not necessarily predict long-term market direction.

• If you’re a short-term trader, heightened volatility presents both risks and opportunities.
• If you’re a long-term investor, market declines tied to volatility spikes often present buying opportunities rather than reasons to panic.

The market tends to recover after periods of elevated volatility. As legendary economist Paul Samuelson once said, “The stock market has predicted nine out of the last five recessions.” In other words, markets often overreact, and patience is often rewarded.

The current VIX reading suggests uncertainty, but history shows that volatility spikes are temporary. The key for investors is to stay disciplined, avoid emotional reactions, and focus on long-term financial goals rather than short-term market noise.