Index volatility has remained low over the last few years while stocks seemingly fly around everywhere, is there a disconnect?

Outside of a few short periods, index volatility has remained fairly stable. The CBOE SPX Volatility Index (VIX) has spent over 80% of the trading days over the last three years below 20. However, it certainly has not felt like that when looking at individual stock volatility with names like NVIDIA (NVDA) Palantir (PLTR) gaining 999% and 2,471%, respectively, over the last three years. While this first point is more or less anecdotal, there is clear evidence that the volatility of the individual names has shifted higher over the last few years, particularly since 2020. The CBOE S&P Constituent Volatility Index (VIXEQ) looks to measure the market cap weighted 30-day implied volatility of a basket of S&P 500 constituent stocks. The goal of VIXEQ is to give insight into single stock volatility while VIX focuses on index volatility.

In the image below, the historical readings for VIXEQ and VIX going back to 2014 are displayed. VIXEQ was launched in November 2024, so data prior to that is hypothetical. Pre-2020, VIXEQ hugged around the 25 level and was much closer to VIX. Since then, VIXEQ, or individual stock volatility, has shifted materially higher while VIX has been well within historical norms. With much more volatility in the individual stocks versus the index itself today, correlations are lower and there are more opportunities for stock pickers or for a few stocks to do exceptionally well (when have we seen that happen?). In any case, as long as constituent volatility remains well above index volatility relative to historical norms, then stock picking strategies have a good opportunity moving forward.