There is a phenomenon in the market called volatility clustering. This refers to the tendency for the state of volatility to persist.
Low vol begets low vol while high vol begets high vol.
We have witnessed this through previous market cycles. Let’s examine three distinct periods from the last market cycle beginning with the bull market that started in 2003 after the Tech Bubble burst.
Post Tech Bubble
After the tech bubble burst in 2000, the subsequent bull market was accompanied by a low vol regime with hardly any VIX spikes above 20.
![Low volatility regime from 2003 to 2007](https://static.wixstatic.com/media/018b5a_a06025fb19384b18810f5463f76e0edf~mv2.png/v1/fill/w_980,h_719,al_c,q_90,usm_0.66_1.00_0.01,enc_auto/018b5a_a06025fb19384b18810f5463f76e0edf~mv2.png)
Great Financial Crisis
However, just before the Great Financial Crisis erupted, VIX spiked to around 30. The VIX fluctuated but largely stayed above 20 throughout the Great Financial Crisis. This marked a high vol regime.
![High volatility regime through the Great Financial Crisis](https://static.wixstatic.com/media/018b5a_2ab0bfec227b4ee8a5e92a2e5e21c1a1~mv2.png/v1/fill/w_980,h_705,al_c,q_90,usm_0.66_1.00_0.01,enc_auto/018b5a_2ab0bfec227b4ee8a5e92a2e5e21c1a1~mv2.png)
"Free" Money Era
Subsequently, with quantitative easing and zero to negative interest rates across some developed countries, we entered a "free" money era and a super bull market began. Any VIX spikes above 20 were quickly suppressed by more quantitative easing or other forms of monetary easing. Hence, for the most part, this period is under a low vol regime. I would consider the COVID-19 and the Inflation scare of 2022 as part of this regime because, despite many countries raising interest rates in 2022, Japan still offered "free" money by keeping the yen borrowing cost close to zero and adopting yield curve control.
![Any volatility spikes quickly suppressed by monetary easing](https://static.wixstatic.com/media/018b5a_2fd430036961485988169af4fb23bdb6~mv2.png/v1/fill/w_980,h_709,al_c,q_90,usm_0.66_1.00_0.01,enc_auto/018b5a_2fd430036961485988169af4fb23bdb6~mv2.png)
A New Era?
We have recently exited the "free" money era since Japan has started raising interest rates and the yen is no longer "free". This is what caused the recent VIX spike. Does this portend another new era? Only time will tell.
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