As the U.S. presidential election nears, the markets are bracing for heightened volatility, particularly within the S&P 500, signaling the first significant movement in the Volatility Index (VIX) in several months. Investors are turning their gaze toward the Chicago Board Options Exchange (CBOE) Volatility Index futures, anticipating notable fluctuations in the S&P 500 as election day approaches.
Current trends in futures contracts for the VIX suggest a growing expectation of increased market turbulence, a sentiment echoed by recent polling data that shows a narrow gap in popularity between the presidential contenders, fueling investor uncertainty. This month alone, VIX futures have surged over 11%, with October contracts—which cover the volatile 30-day period starting October 16—standing nearly 3 points higher than their September counterparts.
Similarly, the VSTOXX futures, tracking the EuroStoxx 50 index’s volatility, indicate a pronounced uptick around the November U.S. elections, underscoring a global anticipation of intensified market movements.
October VIX futures peak around election time
While rising volatility forecasts do not necessarily predict market direction, history shows that volatility often accelerates during market downturns. According to Rocky Fishman, founder of Asym 500, a derivatives research firm, the current premiums on election-period volatility are speculative and may not materialize as expected. Fishman suggests that the market is predominantly pricing in anticipated volatility, with the real action in derivatives expected to unfold later in the year.
Sept-Oct VIX Spread steady at 3 basis points
Yves Bonzon, Chief Investment Officer of Julius Baer, expressed concerns over the persistent uncertainties surrounding the election, hinting at a potential consolidation phase in the markets leading up to November. Bonzon anticipates a possible 10 to 15 percent market correction, which he believes could serve as a healthy adjustment.
FactSet analysts, however, advise investors not to let fears of short-term volatility derail their long-term strategies. Historical data from the past two decades reveals that volatility spikes around elections are typically ephemeral, with equity and high-yield bond markets often resuming their prevailing trends post-election, irrespective of the outcome.
Investors looking to leverage the VIX during this period have options: going short on the expectation that actual volatility will fall short of what’s predicted, or going long to capitalize on potential spikes in volatility following the election results. Han Dieperink, CIO at Aureus, explains that volatility premiums, akin to insurance premiums, tend to dissipate once the underlying uncertainty—such as election outcomes—is resolved.
Despite its role as a gauge for market sentiment, the accuracy of the VIX as a predictor of market fluctuations has been a topic of debate. Some analysts argue that the index is suppressed by investment strategies that involve selling options, a practice believed to artificially dampen market volatility. This theory, however, is contested by Mandy Xu of Cboe Global Markets, who argues against the significant impact of such strategies on the derivatives market.
Rocky Fishman remains confident in the VIX’s reliability, asserting that a robust S&P 500 performance is naturally accompanied by a lower VIX, indicating that current levels of realized volatility are not anomalously low.
As the election draws closer, the financial community remains vigilant, ready to navigate the expected volatility with a keen eye on the long-term horizon.
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