The stock market has given investors an incredibly smooth ride for the past 18 months.
How smooth? The last time we saw a 10 percent correction in the S&P 500, no one had heard of a "Brexit," and Bernie Sanders had better odds of becoming president than Donald Trump.
The stock market is prone to ups and downs, but there is no denying that it's been more escalator than roller coaster for the past year-and-a-half.
In investment terms, the opposite of smooth would be "volatile." And the most accepted method Wall Street uses to measure volatility is the Chicago Board of Exchange's Volatility Index, better known as the VIX. Also referred to as the market's "fear index," the VIX is meant to reflect expected volatility in equity markets in the coming 30 days.
When the VIX climbs higher, it indicates investors are concerned about the stock market as often happens during a sharp correction, or sometimes on the heels of geopolitical turmoil. For some context, the VIX's all-time high came in October 2008 after stock prices had collapsed roughly 40 percent in the previous 12 months.
When the VIX is low, investor sentiment (and investment returns) tend to be exceptional. A week ago, the VIX sat near its lowest mark since 1993. In July, the VIX closed below 10 for 10 consecutive trading days. From 2003 to 2016, it closed below 10 a total of four times. You could easily argue that the past 18 months represent one of the least-stressful periods in modern history to be invested in stocks.
You might be tempted to think that such a long stretch of steady gains, devoid of big downturns, makes it more likely that the S&P will reverse course and head lower. The VIX spiked 44 percent last Thursday following Trump's incendiary comments about North Korea, but history suggests stock prices are no more vulnerable now than they would be following a run of more average volatility.
After the VIX hit its all-time low in December 1993, the S&P 500 then rose 225 percent over the next six-and-a-half years.
As the fine print at the bottom of your monthly statement reminds you, past performance is not necessarily indicative of future results. A recent string of historically low volatility will end sooner or later and investors should prepare themselves emotionally for when that happens. Higher volatility, however, won't necessarily coincide with a bear market.
Whether the path from here remains smooth, the patient investor remains most likely to reach their destination.
Ben Marks is the chief investment officer at Marks Group Wealth Management, Minnetonka.
