Traders Betting on Big Market Swing Regardless of Election Outcome
Regardless of which candidate wins the White House on Tuesday, traders on Wall Street are betting on a big swing in the markets come November 9.
The average post-Election Day move in the broad S&P 500 – which is often seen as a barometer for the U.S. economy -- is 1.1%, but S&P 500 options are implying a 3.7% move, according to figures crunched by Credit Suisse derivative strategist Mandy Xu. Market moves of more than 2% following an election have happened just twice in the last 58 years.
“The only election to truly surprise investors was the 1948 one between [Harry] Truman and [Thomas] Dewy,” Xu wrote in a note. “Polls had Dewy in a substantial and consistent lead the entire time, yet Truman ended up winning by 4.5%. Markets did not like the surprise, with the S&P falling 4.5% the day after, down 10% in a week, and realized volatility more than tripling to a high of 27%.”
While polling data has been fluid, Democrat Hillary Clinton has on average maintained a slight lead.
Back in September, Clinton had a more than 7% lead over Trump, according to RealClearMarkets polling average. The contest narrowed significantly two weeks ago after the FBI reopened the investigation into her use of a private email server during her time as Secretary of State. But it wouldn’t be the 2016 election without another twist: On Sunday, in a letter to Congress, FBI Director James Comey said after reviewing the new emails, the bureau would make no changes to its July decision not to pursue criminal charges against her.
Still, the polls show a close race just one day before voters head to the polls. On Monday, Clinton held a four-point edge against Trump, according to the latest FOX News poll.
While polling methods have become more sophisticated since Truman and Dewy’s battle for the White House, Xu said it isn’t surprising volatility has risen ahead of the conclusion of the white-hot race between Clinton and Trump. That’s due in part to a shock outcome from the so-called Brexit vote in June when citizens of the United Kingdom voted to leave the European Union. Ahead of the results, both polls and betting odds indicated the “remain” vote would prevail.
The unexpected outcome sent shockwaves through global markets, with the U.K.’s FTSE 100 plummeting more than 3% the day after results were tabulated. In the months after, though, the FTSE has rallied back 8%.
While the perception of uncertainty has somewhat diminished on the eve of Election Day, traders are still bracing for stock-market volatility as they bid up the safety of insurance-like options contracts. In addition, the VIX, commonly referred to as Wall Street’s fear index, spiked to 22 last week, while the S&P 500 shed 3.07% over a nine-day period, the longest stretch since the 1980. Trading action on Monday, though, look to snap that losing streak as the S&P 500 surged more than 1.7% on the news of the FBI’s latest decision.
Still, some market watchers are skeptical.
“We might have one initial knee-jerk reaction [after the election], but I think it’s going to be a big nothing because we’re already seeing it priced into the market now,” Larry Shover, chief investments strategist at Solutions Funds Group, said.
He said the heightened anxiety isn’t just due to the highly-charged election season. Investors are also placing bets for higher interest rates from the Federal Reserve in December as they continue to monitor incoming economic data.
“I think there’s this general central bank repricing going on around the world. People realize the market has gone up for the last five or six years because of cheap rates and quantitative easing. So, when all of a sudden dovish policy isn’t glamorous anymore, it’s hitting home that stocks will have to move on fundamentals and not just central bank action,” Shover explained.
While he takes a long-term investing approach, he recommended waiting until after the election to make any big investment decisions. At that point, he said a move out of quality dividend-paying stocks into growth stocks could be warranted.
“When people realize rates are going higher, the amount they’re paying for the quality stocks has become way too much. It’s a crowded space,” he said.