How Market Volatility Plays Into The Fear Index

STEVE INSKEEP, HOST:

The end of 2018 was a time for anxiety if you own stocks. The market plunged only to soar days later and then slip again. But there might be less cause for concern than it seems. Here's Stacey Vanek Smith and Paddy Hirsch from NPR's Planet Money Indicator podcast.

STACEY VANEK SMITH, BYLINE: Market volatility is measured with something called the Chicago Board of Options Exchange Volatility Index, or the VIX.

PADDY HIRSCH, BYLINE: The VIX - also known as the fear index.

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VANEK SMITH: It's a much better name but a little terrifying.

HIRSCH: And the reason it's called the fear index is because when investors are afraid, they can tend to start acting erratically, like buy, sell - wait. No. Buy. And volatility like we've been seeing recently can be really stressful unless you're Georgetown economist Jim Angel.

JAMES ANGEL: I kind of enjoy the volatility.

VANEK SMITH: Really?

ANGEL: Yeah. I mean, because this is the stuff I study, right? I'm a nerd.

HIRSCH: Now, Jim says this volatility is happening because there's just a lot of uncertainty right now. Like, there's a lot of big, important stuff - feels like it's up in the air, both politically and economically.

ANGEL: What's going to happen with the government shutdown? What's going to happen with trade wars and tariffs? And many people think that a recession is coming. We just don't know how, when or how deep.

VANEK SMITH: So, says Jim, there are reasons to be super worried. But one of the things that he told me is that volatility is actually normal and healthy in the stock market.

HIRSCH: Jim says the extra volatility that we're seeing right now worries him a lot less than what happened to the fear index in 2017. 2017 was actually one of the least volatile years for the stock market ever. Stocks just did this slow, steady march up and up and up and up.

ANGEL: When the markets are too complacent and everything looks really good, that's when you should be worried.

VANEK SMITH: So, Paddy, to sum up the first reason to be optimistic according to Jim Angel in spite of all this volatility is that a certain amount of volatility is healthy.

HIRSCH: The second reason to be optimistic, according to Jim, is that when people are scared and stock prices fall, those stocks get cheaper.

ANGEL: It means I'm going to get better prices when I buy stocks at the end of the month as part of my normal retirement plan.

HIRSCH: So if you are saving money for retirement through work in a 401(k) plan or a 403(b), Jim says a volatile market can be good news depending on who you are.

ANGEL: A fall in the stock market is great news for young people. The fact that stock prices have come down means that when they take this month's paycheck and buy some stocks with it, I get more shares than I got last month.

HIRSCH: But this brings us to the bad news. If you're close to retirement, a falling stock market or a really volatile stock market is really hard to deal with because you don't know if you should pull your money out or keep it in or move it into safer territory.

ANGEL: We call that period when people are in their 50s and 60s the retirement red zone.

HIRSCH: The red zone.

(LAUGHTER)

VANEK SMITH: Yes. And Jim says, you know, if you're in the red zone, what you have to try to figure out right now when the markets are really volatile is if this is a temporary blip or if this is signaling, you know, a coming drop in the stock market. Of course, knowing that is not possible, so you just have to guess.

ANGEL: I'm not a very good soothsayer or astrologer, so I would say consult the people who slaughter the pigeons and look at the entrails for a better forecast.

VANEK SMITH: And don't buy stocks during Mercury retrograde.

(LAUGHTER)

VANEK SMITH: And that is the point, right? When people don't know, they get scared and then the stock market kind of wigs out and jumps around just like it's doing right now.

HIRSCH: This could be a long year.

VANEK SMITH: Stacey Vanek Smith.

HIRSCH: Paddy Hirsch, NPR News. Transcript provided by NPR, Copyright NPR.