The US election is just one risk among many for the nervous stock market

By Saqib Iqbal Ahmed and Laura Matthews

NEW YORK (Reuters) – Rising risks to U.S. stocks are fueling demand for portfolio hedging, options markets showed, as investors grapple with U.S. economic uncertainty, a shift in Federal Reserve policy and a 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 to the index’s 2024 average of 14.8, which measures the demand for protection against inventory fluctuations.

The VIX typically rises about 25 percent between July and November in election years as investors focus on the market implications of candidates’ policy proposals, BofA data showed.

However, this year political concerns have joined more pressing catalysts for volatility, such as worries about a potential softening of the US economy and uncertainty about how deeply the Fed will need to cut interest rates, the investors said. The S&P 500 posted its biggest weekly percentage loss since March 2023 last week after a disappointing second jobs report, although 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 that we know the risk is elevated, but … we don’t know what the problem is going to be.”

With volatility already high, the “election hype” in October VIX futures, which includes the November 5 vote, is much smaller than in previous years. They traded at 19.55 on Tuesday, less than 1 point above September contracts. Furthermore, the gap between the highest and lowest volatility contracts is barely over 1 volatility point.

In the 2020 and 2016 election cycles, the futures curve showed a gap of 7.3 and 3.4 points, respectively, between the months with the highest and lowest volatility, a Reuters analysis of LSEG data showed.

SPEED BUMPS AHEAD?

The VIX has been in the eyes of investors more than usual in recent weeks after the index hit its biggest one-day peak ever on August 5 during a sudden market sell-off fueled by economic worries and a declining yen global. trade.

Although the volatility took only a few days to subside, the index rose again as the markets grew jittery again in recent days. Societe Generale analysts on Monday advised investors to remain hedged for the next three to six months, warning of possible volatility from unpleasant economic surprises and geopolitical factors such as the US election and conflict in the Middle East and Ukraine.

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Others, however, see reasons for investors to be less nervous about election risks this time around.

Stocks have done well under both Trump and President Joe Biden, noted Seth Hickle, managing partner at Mindset Wealth Management. Given that Harris’s policies are close to those of Biden, a victory for either candidate does not pose a major challenge to investors.

“We don’t have a lot of uncertainty when it comes to what will change. I don’t think that scares the market because we’ve been through it before,” Hickle said.

Still, Tuesday’s debate has the potential to roil the markets.

“Since the last presidential debate literally ended with 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)