Traders are gearing up for an increase in volatility around the November elections in the United States, according to one market indicator. Stacey Gilbert, CIO of Glenmede Investment Management, said that the futures market for the Cboe Volatility Index is showing a distortion around the November election. “You can see a real kink in the curve there that wasn’t there for other years. … I would expect us to get a much better handle on investor expectations as we get let’s say within 2 to 3 months of that,” Gilbert said. The index, which is referred to as the Vix by traders, is a measure of expected volatility that is sometimes called Wall Street’s “fear gauge.” Vix futures are basically a way to bet on or hedge against where the index will be trading at the time of expiration. Because the Vix itself is a forward-looking tool, the expiration date for the October futures — which is the highest near-term reading — is reflective of the potential volatility around the election. “Clearly investors are concerned around this election. The expectation for volatility around this election is pretty sizable,” Gilbert said. The presidential election does not appear to be driving the market so far this year, with Donald Trump easily winning the Republican primary and President Joe Biden facing no serious challengers on the Democratic side. But the race could begin to emerge as a major focus soon, with the first debate scheduled on Thursday. The curve is not the only sign that investors are uncomfortable about the election. An increasing share of fund managers, some 16%, said that the U.S. election was the biggest tail risk to the market, according to the Bank of America fund manager survey — up from 9% in May. The election typically is something of a turning point for markets, according to Ed Clissold, chief U.S. strategist at Ned Davis Research. And there is some extra uncertainty this cycle — Clissold pointed out that this is the first rematch in the presidential election since 1956, and one of the top issues in the 2020 race was the Covid pandemic response, which is no longer top of mind for voters. “The market does tend to fall into the election, particularly if it’s a close rally because of the uncertainty, and then once the winner is known, there tends to be a relief rally. The rally has happened under Democrats and Republicans,” Clissold said. “It would stand to reason that the Vix, or volatility in general, would increase around then,” he added. To be sure, the Vix itself is fairly low by historical standards currently. The futures curve as of Friday morning showed that the October contract was priced at 19, which would also be a sharp increase but not a historically high level.
