Financial ‘fear gauge’ fluctuates wildly in volatile US

Many financial experts have commented frequently in 2020 that stock markets have lost any connection they had to the real world, and as if to provethe point global indices generally responded positively to one of the most chaotic and potentially worrying days in the recent history of the US, the biggest economy and financial market in the world.

Markets are supposed to hate uncertainty, but as the result of the 2020 US election veered from one alternative to another via multiple possibilities and knife-edge outcomes, the S&P 500 index, the most widely watched market barometer, took it all in its stride, ending the day up 2.2 percent and not far off its highs for the year.

It was a reassuring performance for investors amid dramatic turbulence at the polling booths and counting halls, magnified by statements from the White House. While Main Street shuddered, Wall Street sailed on serenely.

Maybe even more surprising than the S&P’s equanimity was the performance of the Vix Index, the US stock market “fear gauge” that measures volatility in financial markets. Having reached record levels of anxiety in the run-up to the election, largely on fears of an uncertain outcome, the Vix, perversely, fell when that uncertainty was confirmed.

How to explain that apparent contradiction? One obvious reason could be that markets were relieved that the predictions of most pollsters — a big win for Joe Biden and a “blue wave” engulfing the Congress — had been taken off the table.

If Biden in the White House had control of the House and Senate he could have pushed through a raft of radical reforms — to the corporation tax system, to the regulatory structure, and on healthcare — that was deemed by some to be anti-business and expensive.

In particular, the US energy sector, concentrated in states such as Texas and Pennsylvania that were generally regarded as “battlegrounds” during the election, could breathe a sigh of relief that a Democrat administration would not interfere in the all-important shale industry.

Even if Biden wins the White House, it looks as though he will not gain control of the Senate, whose approval is needed for any big pieces of domestic legislation that could affect business and finance.

Frank Kane

On the other hand, Biden has pledged a $2 trillion injection into the renewable sector, which has been a big focus for investment recently as traditional oil company shares have plummeted. That, too, is off the table for the foreseeable future.

Even if Biden wins the White House, it looks as though he will not gain control of the Senate, whose approval is needed for any big pieces of domestic legislation that could affect business and finance.

However, a Biden presidency would also open the doors to a much bigger fiscal stimulus package than the current administration had proposed.

Given that the multitrillion-dollar injections into financial and debt markets was the main reason for the resilience of stocks and shares during the economic carnage of the coronavirus pandemic, and that failure to agree a further stimulus package was the main reason for market declines last month, this would have been a big boost to the indices.

In the current fractious political atmosphere, that will not happen now, and is likely to be impossible until January, when either President Biden is inaugurated, or President Trump begins his second term.

There are so many variables to the broader political and economic backdrop in the next few weeks that it is dangerous to make generalizations, but Wall Street at least appears to have concluded that it will be a Biden presidency, with a Republican-dominated Congress that will rein in the most radical and expensive items on Biden’s policy list.

Events will show how that pans out. In such a volatile situation as the US at the moment, nothing is certain. Perhaps the best investment play now would be to buy the Vix Index in anticipation of further volatility.

 

• Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai