Right now both leading indicators and credit markets are suggesting what most investors intuitively realize: The VIX should be low, although arguably not as low as 10. The two-factor model suggests fair value for the VIX somewhere in the mid-teens, roughly where it peaked last week. To the extent credit markets take the events in Washington in stride—even during the worst selling last week high yield spreads remained comfortably below 400 basis points (4%)—equity investors can breathe a little easier, at least until they can’t.
Russ Koesterich, CFA, is head of asset allocation for BlackRock’s Global Allocation team.