NEW YORK (Reuters) – Market volatility is back – and investors anticipate further sharp fluctuations in the coming weeks and months as the US presidential election approaches.
PHOTO: BGC Partners traders look at screens after Donald Trump’s victory in the US presidential election in London, UK, November 9, 2016 REUTERS / Toby Melville
Some observers say that regardless of who wins the November 3 elections, markets are likely to become more turbulent. The economic uncertainty caused by the coronavirus pandemic continues to threaten, and the possibility of a delayed count of votes due to the large number of ballots sent by mail has also worried some investors. What’s more, the build-up in large technology-related stocks increased risk, as evidenced by the sharp sell-off in the market on Thursday.
“It’s just a situation where the conditions are in place for extraordinary profits,” due to volatility, said James MacDonald, executive director of Los Angeles-based hedge fund Hercules Investments.
The Cboe Volatility Index has risen over the past two weeks, with investors chasing further gains in US stocks using call options, and then looking for protection from the indices plunge at record highs. On Thursday, the VIX jumped to its highest level in nearly 10 weeks, as the S&P 500 .SPX fell 3.5%.
Some investors say the VIX could rally further as the election approaches, especially given that some indicators are showing a tightening race. In betting markets, Democratic candidate Joe Biden’s advantage over President Donald Trump has narrowed significantly, according to RealClearPolitics.
Indeed, the VXc2 second month Cboe Volatility Index futures, which will expire at the end of October, indicate expectations of more significant market moves during the election period. The gap between second month futures and the VIX widened to a record high earlier this week.
GRAPHIC: Positioning for US election volatility – Here
REPEATING HISTORY?
Recent history shows that election results can have a profound effect on asset prices.
Basically, Trump’s surprise victory triggered sharp swings in the markets on election night 2016, when gold, Mexican peso, and equity futures among assets swung sharply.
Earlier in the year, the British pound GBP = fell to its lowest level against the dollar = US dollar in decades after the UK voted to leave the European Union.
A protracted tally of mailed newsletters could be one of the key catalysts for instability this time around, said Arnim Holzer, EAB Investment Group’s macro and correlation defense strategist.
“The volatility can actually last … longer because of the nature of the electoral process itself, regardless of who wins,” Holzer said.
McDonald, meanwhile, bought December and June calls on the ProShares Ultra VIX Short-Term Futures ETF (UVXY.P), which also grows along with volatility.
He said he had already profited from Thursday’s volatility spike that pushed UVXY up 20% to $ 28.90, and he expects the ETF to rise to $ 40 by the end of the year. By actively trading UVXY as it grows, McDonald believes he can make a $ 1 billion return on his $ 55 million investment. However, if UVXY falls below $ 10 towards the end of the year, MacDonald will lose his remaining December options investment.
The strategy could pay off, said Henry Schwartz, head of product analytics at Cboe Global Markets, but even with election fears, further spikes in volatility are not inevitable.
Other investors have added hedging to their portfolios. Matt Thompson, managing partner of Chicago-based options firm Thompson Capital Management, has long positions in both US stocks and VIX-linked assets such as Barclays iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX.P). He expects the VIX to rise in the weeks leading up to the election, as it did in 2016.
PHOTO: Road sign in front of the New York Stock Exchange on Wall Street in New York, February 10, 2009 REUTERS / Eric Thayer
Holding assets associated with the VIX for an extended period can be unprofitable given that the index tends to return to its long-term average rather than rising steadily.
But the recent simultaneous rallies in the VIX along with US stocks have made such positions profitable, Thompson said, and he expects them to maintain gains as the election approaches.
“Right now, this is a great scenario for people who are hedging,” he said.
Reporting by April Joyner; Editing by Megan Davis, Ira Iosebashvili and Lisa Shumaker
