Dow Jones Volatility Is Plunging. Here’s What It Means for Stocks

Dow Jones and S&P 500 volatility have hit their lowest levels in over a month, as the stock market calms in the face of government action to prevent the spread of coronavirus.

  • Stock market volatility has declined to its lowest levels since the end of February.
  • Investors have been calmed by intervention from the Federal Reserve and government.
  • With the Trump administration laying a framework for the reopening of America, expect volatility to continue declining.

Stock market volatility has returned to its lowest levels for over a month. The Dow Jones volatility index closed Friday at 44.19, its lowest value since March 6. Earlier in the week, it reached its lowest level since February.

Meanwhile, the CBOE Volatility Index — which tracks the S&P 500 — has also calmed to its lowest levels since the opening of March.

Together, these reductions represent an important milestone for the U.S. stock market. Interventions from the Federal Reserve and the government have reassured investors that, even with a coronavirus pandemic, the wheels of the American economy won’t be falling off.

And with Donald Trump outlining plans for the gradual reopening of America, volatility could decline even further.

Dow Jones Is Less Volatile, Investors Are More Optimistic

Volatility indexes are also known as “fear indexes.” So if the Dow Jones VIX is anything to go by, investors are becoming less fearful.

DJIA VIX. | Source: Business Insider

The Dow volatility gauge reached a high of 71 on March 18. Since then, it’s dropped by 37%.

At the same time, CBOE’s volatility index has also fallen. Tracking stocks listed on the S&P 500, it set a record close of 82.69 on March 16. On Friday it closed at 40.11, a reduction of 51%.

CBOE VIX. | Source: Yahoo!

Admittedly, both the Dow Jones VIX and CBOE VIX are still comfortably higher than where they were a year ago. But compared to how they were in mid- and late-March, their recent declines come as good news to investors.

So while the rest of April will no doubt remain uncertain, these declining volatility scores show that the stock market is gaining confidence.

Government Acts, Stock Market Relaxes

Ultimately, we have government and Federal Reserve intervention to thank for the Dow Jones calming down.

On March 23, the Federal Reserve began what it referred to as “unlimited” quantitative easing. Since then, its balance sheet has hit a record $6.13 trillion, with officials adding $1.7 trillion through the purchase of securities, bonds and other assets.

As a result, the the Dow Jones has recovered by 28.4% from its bottom.

Dow Jones. | Source: Yahoo!

The U.S. government’s actions have also reassured investors, particularly since the coronavirus outbreak in America took a turn for the worse at the end of March.

On March 26, the United States overtook China as the nation with the most coronavirus cases. On March 27, Trump signed a “historic” stimulus package worth $2 trillion.

Such interventions have laid the foundation for a gradual improvement in stock market volatility. With investors reassured that the Fed and the government aren’t going to let things grind to a halt, they’ve been more willing to buy. No doubt, QE-on-steroids has also helped ease their nerves.

Reopening America

At the same time, investors have been able to rally around a number of companies that are doing well out of the coronavirus crisis. Amazon has risen to all-time highs, while pharmaceutical giant Gilead recently drove another Dow Jones rally.

On top of this, Donald Trump has laid out a plan to reopen America for business. And with the President declaring that “we have passed the peak in new cases,” we can expect to see stock market volatility declining further in the coming weeks.

Last modified: September 23, 2020 1:50 PM

Simon Chandler

Markets Contributor for CCN living in London, UK. Has a Bachelor's degree in History and Archaeology from Reading University in 2006, and a Master's in Philosophy from King's College London in 2011. Email me | Follow Me on Twitter.