SPX futures are up nearly 10 points to 1891. The Powerball $1.5 billion had a winner(s). Obviously not on this desk given that I am present today. Crude is up to $31 and gold is flat at $1086. Initial jobless claims came in higher than expected. The cash VIX moved to 25.22 yesterday on the 2.5% drop in the S&P 500 Index. The VIX futures are all lower in parallel fashion by .26 on average given the positive equity tone.
Goldman came out with its volatility forecast for 2016. The prediction is based on analysis of trends in GDP growth rates, unemployment rate, core PCE inflation, FED hikes, and ISM data. Goldman predicts an average VIX of 19 and S&P 500 realized volatility of 17 for 2016. They also compare that with a model that simply uses US GDP growth rates which suggest a VIX of 20 and S&P realized volatility of 16.5. Additionally, when they use global GDP growth forecasts, VIX comes in a bit higher at 22 and S&P realized volatility of 19.
They also note that the VIX has a very strong cyclical component as you would expect. According to Goldman, “the unemployment rate, ISM new orders, and consumer spending are three macro variables with explanatory power for modeling S&P 500 realized volatility and VIX levels across the business cycle.” A regression analysis has shown that these three factors explain 58% of the variability in the VIX (dating to 2000).
Goldman offers a few rules of thumb in their analysis (all else equal). With ISM levels 52 or lower, VIX will be 20 or higher. If ISM is in the high 50’s to low 60’s the VIX will be in the mid-teens. In a nutshell, the VIX tends to rise about 5 points for every 1o point decline in ISM new orders. Goldman expects ISM composite around 54. With respect to the unemployment rate, VIX levels tend to decline 3.2 points for every one point yoy decline in the unemployment rate. Goldman expects 2016 unemployment to move from 5% to 4.6% in 2016. With respect to GDP, recession VIX levels fall in a range of “high-twenties to low-thirties”. Goldman expects GDP to grow at 2.25%.