SEPTEMBER 21, 202010:48 PM By Nancy Lapid
For reasons well known by investors, 2020 has
seen an explosion in realized and expected stock-market volatility. Don’t
expect that to change once the election is over.
The Cboe
Volatility Index, or VIX—a measure of
market volatility calculated from pricing of S&P 500 options for the next
month—has remained in the high 20s even as the market has steadily rebounded
from its tumultuous selloff in February and March.
The VIX hit a post-financial crisis high of
82.7 on March 16, after spending most of the past decade in the teens, with
only brief spikes above 20. It closed at more than 29 on Wednesday. That
implies daily moves of about 1.8% for the S&P 500 over the coming month.
And traders and options buyers see volatility
picking up in the remainder of 2020. The November U.S. election, a potential
fall resurgence in Covid-19 cases, a successful vaccine trial—numerous events
could swing the market higher or lower, and uncertainty remains high. Futures
markets are currently pricing a VIX at 32.4 in October, 33.4 in November, and
31.9 in December.
That’s an evolution in the VIX curve from its
shape earlier this year and in prior election years, when futures were highest
for October and declined in the final two months of the year. Now, traders are
pricing in greater volatility in the month after the election than the one
before.
Here's Matt
Rowe, chief investment officer at Headwaters
Volatility:
In elections past, it was easier to come to
assume we would know the winner by the first few days of November. This year,
the kink in the VIX curve has moved from October to November. The preponderance
of mail-in ballots and the strategy of confusion around election integrity, particularly
from the incumbent, gives reason to believe this election is not going to be
done and celebrated within a couple of days.
That has implications for the stalled fiscal
stimulus legislation in the near term, and other policy in the long term. In
contrast with the bipartisan sense of urgency to get support passed in March,
the next coronavirus relief bill has turned into an election issue, with
compromise hard to find in Washington. Federal
Reserve Chairman Jerome
Powell and economists have pointed to the need for
further stimulus to keep the U.S. economic recovery going and unemployment
falling. That in turn has implications for corporate earnings and stock
valuations.
A period of uncertainty in the weeks after the
election around the winner and the impact on fiscal policy implies a wide
potential distribution of levels for the S&P 500—more or less what the VIX
measures.
“A VIX at 29, historically speaking, is pretty
high,” Rowe says. “For where we sit right now, it seems about right.”
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