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Stocks posted their worst day since early June on Wednesday, pushing market volatility to a four-month high as uncertainty surrounding the election season collides with a surprising increase in coronavirus cases, but with just six days to go. elections, the peak of volatility may still be ahead, as experts contemplate the possibility of a contested election to really increase the uncertainty.
US President Donald Trump debates Democratic presidential candidate Joe Biden at Belmont University … [+]
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Highlights
At the close, the Dow Jones Industrial Average was down 3.4%, or 940 points – the worst loss since the index hit nearly 1,900 points on June 11, the same day volatility expectations fell. reached their last peak.
The S&P 500, meanwhile, fell 3.5%, wiping out all of its gains over the past month, and the tech-rich Nasdaq fell 3.7%.
The Chicago Chicago Board Options Exchange’s CBOE Volatility Index (VIX) – which measures expectations of volatility over the next 30 days and is commonly referred to as the “fear gauge” – rose as much as 20% on Wednesday.
Rob Emrich, founder and managing partner of Texas-based Acruence Capital, said he was considering models whose volatility expectations rose to heightened levels through May, with the likelihood of a contested election being a catalyst. major for increased volatility in the coming weeks.
Others are equally cautious: “Volatility is the only asset class with clear upside potential at this time,” said Los Angeles-based Hercules Investment CEO James McDonald, who believes the fluctuations stock markets could intensify after the election, causing losses. up to 20% if there is no clear result.
“Time will tell if expected volatility turns into realized market volatility,” says Charley Ripley, senior investment strategist for Allianz Investment Management, adding that the market for now “is preparing for the period before and beyond. of the election to experience some market turbulence. “
Key context
Fueling volatility, the economic recovery in recent months has been slow and uneven, with indicators such as retail sales recovering fully and some, like home buying, hitting more than 10-year highs as millions of Americans remain unemployed and jobless weekly. claims are struggling to recover. “Elections can get messy, and given that the pandemic will likely alter the way results are received with an increase in mail-in ballots … we expect markets to maintain a high level of volatility until, and maybe beyond, November 3 election day, “said Ripley of Allianz. Traditionally high market volatility during election season has also been compounded in recent weeks by a prolonged back-and-forth in Washington over another round of fiscal stimulus, and the addition of the recent increase in coronavirus case appears to have marked a tipping point for the market. After peaking at 38.28 in early September, the VIX declined through the mid-20s at the end of the month, about 40% below current levels.
Crucial quote
“The stock market tells us COVID-19 isn’t going away anytime soon – increasing cases and lockdowns in Europe raise fears of further lockdowns in the US, and record rally since March lows and suspected recovery have probably come to an end, “says McDonald.” Expectations that COVID-19 would now be under control are gone, and we are seeing stocks drop another 10-20% from here. We believe if the S&P 500 drops below 3,200 ahead of the election, its next move could be another 12% drop. “
What to watch out for
The election results and when we get them. Wall Street pundits, including Ripley last week, warn that a contested election could further increase volatility, as it naturally increases uncertainty. When election results were last challenged in 2000, “the stock markets sold off and credit spreads widened as a result,” Ripley notes. The worst-case scenario for the markets, characterized by a disruptive legal or legislative battle, could arise “if the polarized nature of our political environment and the already fragile state of the economy [prompts] market to assess potential business risks of government malfunction, ”said Burt White, chief investment officer of LPL Financial, earlier this month, adding that such a result, while unlikely, could lead to a correction, causing stocks to fall by 10% or more.
Chief critic
Brian Overby, senior options analyst for Ally Invest, said Wednesday’s anxiety level might be “a bit of a stretch” as current VIX levels imply the S&P could hover around 2% – a sentiment taken over by Emrich. Ultimately, Overby believes volatility could drop until the end of the year, with traders expecting markets to calm down after the election.
Large number
2,997. That’s the number of points the Dow Jones was down when it collapsed 13% on March 16 – the biggest point drop in history, triggered by a sell-off as the investors have realized how crippling the coronavirus can be for the economy. The VIX climbed nearly 43% that day.
Further reading
Dow plunges 600 points on third day of losses as market panics over Covid resurgence (Forbes)
