NEW YORK: Market volatility is back — and investors expect more wild swings in the coming weeks as the US presidential election closes in.
Regardless of who wins the Nov. 3 election, some market watchers say, markets are likely to grow more turbulent. Economic uncertainty resulting from the coronavirus pandemic still looms large, and the possibility of a delayed vote count due to a large number of mail-in ballots has also unsettled some investors. Moreover, a buildup of positions in big tech-related stocks has increased risk, as seen in a sharp market sell-off on Thursday.
“This is just a situation where all the conditions are ripe for an extraordinary profit” from volatility, said James McDonald, CEO of Los Angeles-based hedge fund Hercules Investments.
The Cboe Volatility Index has climbed over the last two weeks, first as investors chased further upside in US stocks through call options and then as they sought protection against a tumble in indexes at record highs. On Thursday, the VIX jumped to its highest level in nearly 10 weeks as the S&P 500 fell 3.5 percent.
Several investors say that the VIX could climb further as the election approaches, especially given that certain indicators show a tightening race. In betting markets, Democratic nominee Joe Biden’s lead over President Donald Trump has significantly narrowed, according to data from RealClearPolitics.
Indeed, second-month futures on the Cboe Volatility Index, which expire in late October, point to expectations for bigger market moves around the election period. The gap between second-month futures and the VIX widened to a record high earlier this week.
Recent history shows that election results can have powerful effects on asset prices.
Trump’s largely unexpected victory set off violent swings in markets on election night in 2016, with gold, the Mexican peso and stock futures among the assets experiencing wild gyrations.
This time around, a drawn-out count of mailed-in ballots could be one key catalyst for volatility, said Arnim Holzer, macro and correlation defense strategist at EAB Investment Group.
