As the U.S. approaches a pivotal presidential election, investors are navigating a complex landscape of economic uncertainty, fluctuating Federal Reserve policies, and political instability. These factors are impacting the stock market, increasing demand for portfolio hedging strategies, and signaling potential market turbulence ahead.
Attention is turning to the upcoming televised debate between Democrat Kamala Harris and Republican Donald Trump, with investors closely watching how each candidate’s policies may influence market performance. Election-related anxiety is contributing to a rise in market volatility, with the Cboe Volatility Index (VIX), often referred to as Wall Street’s “fear gauge,” rising above its 2024 average. Currently near 20, the VIX has surpassed its typical election-year trend, which historically sees a 25% increase from July to November, according to Bank of America (BofA) data.
While political developments usually drive volatility during election years, this year’s VIX surge has been further fueled by broader economic concerns, including signs of a softening U.S. economy and uncertainty surrounding the Federal Reserve’s upcoming interest rate decisions.
Last week, the S&P 500 recorded its largest weekly decline since March 2023, triggered by a second disappointing jobs report. Despite gains of nearly 15% this year, recent economic indicators have left investors on edge. With the Federal Reserve meeting set for September 17-18, speculation continues over potential rate cuts.
The November 5 election adds another layer of complexity to market forecasts. Typically, the lead-up to an election brings increased market uncertainty. However, this year’s “election bump” in October VIX futures is smaller than in previous cycles. Futures tied to October volatility traded at 19.47 on Tuesday, slightly higher than the September contracts at 18.07, with just over a 1-point gap. This is a stark contrast to the 2020 and 2016 election cycles, where the volatility gap between futures contracts ranged from 3.4 to 7.3 points.
Though political uncertainty remains a key factor, this year’s election seems to be having a more muted effect on volatility compared to past cycles. Some analysts suggest this smaller gap indicates underlying market confidence, despite the political uncertainty. During the June debates, for example, President Joe Biden’s poor performance temporarily boosted expectations of a Trump victory, which led to rallies in sectors like small-cap stocks and energy that are seen as benefiting from Trump’s policies. However, enthusiasm diminished once Harris replaced Biden as the Democratic candidate, and the polling gap between the two narrowed.
Investors remain cautious despite the smaller election bump. The VIX has drawn particular attention in recent weeks after posting its largest-ever one-day spike on August 5, driven by concerns over a weakening economy and the unwinding of the global yen carry trade. Although volatility briefly eased, it has crept back up due to ongoing economic and geopolitical concerns.
Societe Generale analysts have advised investors to remain vigilant, recommending that portfolios stay hedged over the next three to six months. They pointed to potential volatility triggers, such as unexpected economic developments, geopolitical tensions, and the election outcome. In contrast, some analysts argue that the market’s relative calm is due to the historical resilience of stocks under both Democratic and Republican administrations. As the debate draws near, investors will be closely analyzing the candidates’ stances on fiscal policy, clean energy, and corporate taxes.
Trump has proposed cutting corporate taxes, tightening trade policies, and critiquing the strength of the U.S. dollar, which he claims has harmed the economy. However, some experts warn that his policies could lead to inflation and ultimately strengthen the dollar rather than weaken it. Harris, on the other hand, plans to raise the corporate tax rate from 21% to 28%, a move that could dampen enthusiasm in certain sectors. Nevertheless, her focus on clean energy—continuing Biden’s initiatives—could benefit solar and renewable energy companies, particularly as they face challenges from high interest rates. Additionally, her push to reduce drug prices may negatively impact healthcare stocks, depending on the extent of those policies.
