By Saqib Iqbal Ahmed and Laura Matthews
NEW YORK (Reuters) – Rising risks to the U.S. stock rally are driving demand for portfolio hedging, options markets showed, as investors grapple with U.S. economic uncertainty, changing Federal Reserve policy and the looming presidential election.
As the spotlight turns to Tuesday’s high-stakes televised debate between Democrat Kamala Harris and Republican Donald Trump, the Cboe Volatility Index is hovering around 20. That compares with an average of 14.8 in 2024 for the index, which towards protection against stock fluctuations.
The VIX typically rises about 25% between July and November in election years as investors sharpen their focus on the market implications of candidates’ policy proposals, BofA data shows.
This year, however, political concerns have merged with more pressing catalysts for volatility, such as worries about a potentially weakening U.S. economy and uncertainty about how deeply the Fed will have to cut rates, investors said. The S&P 500 last week posted its worst weekly percentage loss since March 2023 following a second straight disappointing jobs report, though the index is still up nearly 15% this year.
“This is an uncertain market,” said Matt Thompson, co-portfolio manager at Little Harbor Advisors. “The market is essentially saying, we know the risk is elevated, but… we don’t know what the problem will be.”
With volatility already high, the “election bump” in October VIX futures, which also includes the November 5 vote, is much smaller than in previous years. On Tuesday they traded at 19.55, less than 1 point above the September contracts. Moreover, the difference between the contracts with the highest and lowest volatility is barely more than 1 volatility point.
In the 2020 and 2016 election cycles, the futures curve showed a difference of 7.3 and 3.4 points between the highest and lowest volatility months, respectively, a Reuters analysis of LSEG data showed.
SPEED BUMPERS AHEAD?
The VIX has been in sharper focus than usual for investors in recent weeks, after the index recorded its biggest single-day peak ever on August 5, amid a sharp market sell-off fueled by economic worries and an unwinding of the global yen. conduct trade.
Although it took only a few days for volatility to subside, the index has crept back up as markets have returned to choppy territory in recent days. Societe Generale analysts on Monday advised investors to remain hedged for the next three to six months, warning of potential volatility from unpleasant economic surprises and geopolitical factors such as US elections and conflicts in the Middle East and Ukraine.
Others, however, see reasons why investors may be less nervous about election risks this time around.
Stocks have done well under both Trump and President Joe Biden, said Seth Hickle, managing partner at Mindset Wealth Management. With Harris’ policies seen as staying close to Biden’s, either candidate’s victory will not pose a major challenge for investors.
“We don’t really have a lot of uncertainty in terms of what’s going to change. I don’t think it really scares the market because we’ve already been through it,” Hickle said.
Still, Tuesday’s debate has the potential to shock markets.
“Given that the last presidential debate literally ended in a brand new Democratic candidate, I expect this to generate some volatility,” Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets, said in a note.
(Reporting by Saqib Iqbal Ahmed and Laura Matthews; Editing by Ira Iosebashvili and Richard Chang)