In a word… "yes," VIX is too low based on the fundamentals underlying the economy, according to Goldman Sachs.
Mapping VIX back to the economy: Our research indicates that changes in 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. Although the VIX is often considered a “sentiment indicator”, a regression of average calendar month VIX levels on these three factors explains 58% of the variability in VIX levels back to 2000. The economic data currently suggests VIX levels of 18.5, about 4 points higher than the average VIX level in April and May.
VIX Scenarios: The exhibits below show simple two-factor models that predict average VIX levels using yoy change in the unemployment rate under our forecasts and the level of either the ISM manufacturing…
Or ISM non-manufacturing indices..
The ISM manufacturing index currently stands at 50.8 and the nonmanufacturing index at 55.7; suggesting average VIX levels in the 17-20 range.
Identifiable headwinds include: higher valuation, positioning, waning buyback demand, potentially hawkish Fed surprises, negative growth surprises and event risks including “Brexit” and the U.S. election. This long list of potential risks skews the distribution of risks to the downside, and after a hefty rally, it seems easier to see the index 5% or perhaps 10% lower rather than higher.
May VIX levels in the low-teens may be pricing further economic improvement or a lower likelihood of Fed action.
via http://ift.tt/1XfYCqW Tyler Durden