August VIX Outburst Previews Bigger Moves in Store for Next Year

  • Index rises from lowest annual levels of current bull market
  • UBS strategist: `Rising risk is quite normal at this point'

August’s bout of stock-market volatility was a forerunner of bigger swings in share prices next year, according to Julian Emanuel, UBS AG’s executive director of U.S. equity and derivatives strategy.

The chart below tracks average annual readings for the Chicago Board Options Exchange Volatility Index, or the VIX, and year-end levels for the Standard & Poor’s 500 Index. The VIX’s year-to-date average through yesterday was 16.53, higher than the full-year figures of about 14 for the past two years.

The VIX climbed to 40.74, the highest close since October 2011, on Aug. 24 after averaging about 14 from Feb. 15 through Aug. 15. The volatility gauge is calculated from prices of S&P 500 options.

“Rising risk is quite normal at this point,” Emanuel wrote yesterday in a report with a similar chart. The New York-based strategist cited two reasons why: a maturing bull market and the prospect that the Federal Reserve is about to begin raising interest rates.

Stocks have been advancing since March 2009, and Emanuel anticipates further gains in 2016. His report introduced an S&P 500 projection for the end of next year of 2,275, or a gain of 9.3 percent from yesterday’s close.

UBS expects the Fed to lift its target rate for overnight bank loans next month for the first time since 2006. The reaction in U.S. stocks and other assets will depend on “the Fed’s ability to ‘sell’ markets on its confidence with regard to economic conditions at home and abroad,” Emanuel wrote.

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