Our Forecast: Average VIX of 19, S&P 500 realized vol 17 in 2016
Our View: Average VIX of 19; SPX realized vol of 17 in 2016
Our forecast points to higher VIX levels in 2016 relative to 2015. Using our
macro volatility model and the views of our U.S. Economics team, we
forecast average VIX levels of 19 and S&P 500 realized volatility of 17 in
2016. In this report we estimate volatility levels based off of U.S. and global
GDP as well as various other economic indicators. Knowing what to expect
across different economic environments could make a big difference when
navigating the volatility environment in 2016.
Navigating the volatility cycle: numbers to remember in 2016
* High-twenties to low-thirties VIX levels equate to recession volatility.
* Regressions of volatility on U.S. GDP growth suggest VIX levels of 20
and S&P 500 realized volatility of 16.5 relative to our 2016 U.S. growth
forecast. Zero GDP growth corresponds to VIX levels of 24-26 with VIX
levels pushing to around 30 as growth drops to -2%.
* Volatility estimates are higher based upon our global growth forecast,
with expected VIX levels of 22 and S&P 500 realized vol of 19 in 2016.
* While it depends upon the external shock, we are more likely to fade
VIX spikes into the high-twenties to low-thirties when the economy is
on solid footing. That said, a high-teens VIX is our base case for 2016
suggesting declines in VIX back to the low-teens may serve as volatility
buying opportunities.
VIX scenarios: Base, bull and bear case
Entering 2016: The 20+ VIX levels we have seen in early 2016 are
consistent with the recent ISM manufacturing numbers below 50.
Base Case: A variety of growth metrics and economic surveys also point to
average VIX levels of 18-20 in 2016 under our U.S. GDP forecast.
What gets the VIX back to the mid-teens? Continued improvement in
the labor market and ISM non-manufacturing in the high 50’s.
What keeps the VIX above 20? We estimate that VIX levels above 20
would be consistent with the ISM composite survey below 53, the nonmanufacturing
survey below 54, and ISM manufacturing below 52, even if
the unemployment rate continues to fall modestly.