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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