The U.S. stock market is currently experiencing a surge in volatility, driven by a perfect storm of economic uncertainty, evolving Federal Reserve policies, and the looming 2024 presidential election. This cocktail of factors is prompting investors to seek protection for their portfolios, as evidenced by the significant rise in the Cboe Volatility Index (.VIX), a key indicator of market risk.
The VIX, often referred to as the ‘fear gauge,’ currently sits around 20, a substantial increase from its 2024 average of 14.8. This uptick is common during election years, as investors weigh the potential market implications of policy proposals from different candidates. However, this year, political concerns are amplified by fears of a weakening U.S. economy and uncertainty surrounding the Federal Reserve’s approach to interest rates.
The recent disappointing jobs report, coupled with the S&P 500’s worst weekly percentage loss since March 2023, has added fuel to the market’s nervousness. While the S&P 500 remains up nearly 15% year-to-date, the overall sentiment is one of cautious optimism. As Matt Thompson, co-portfolio manager at Little Harbor Advisors, aptly puts it, “The market is essentially saying, we know risk is elevated, but … we don’t know what the problem is going to be.”
Adding to the uncertainty is the upcoming presidential election. A recent CNBC survey revealed that 67% of investors believe former President Donald Trump’s return to the White House would be more beneficial for stocks. This sentiment is based on historical performance, with the S&P 500 and Nasdaq seeing significant gains during Trump’s previous tenure. Trump himself has made claims about a potential market crash if Vice President Kamala Harris wins the election, drawing comparisons to the infamous 1929 crash.
Beyond the election’s direct impact on markets, there are also concerns among Silicon Valley executives regarding a potential tax proposal. Whether this proposal is part of Harris’s economic plan or a continuation of President Joe Biden’s policies remains unclear. However, the proposed tax on unrealized capital gains has sparked anxiety among tech elites, further adding to the market’s volatility.
In the face of this heightened uncertainty, investors are closely watching the VIX, particularly after its largest-ever one-day spike on August 5th, coinciding with a sharp market sell-off. While volatility subsided in the days that followed, the index has climbed again as markets continue to experience choppy trading conditions. Societe Generale analysts, recognizing the volatile landscape, have advised investors to maintain hedged positions for the next three to six months. They cite possible volatility from unforeseen economic surprises and geopolitical factors, including the upcoming U.S. elections and ongoing conflicts in the Middle East and Ukraine.
The current market climate underscores the importance of careful investment strategies and risk management. Investors are navigating a complex and uncertain environment, requiring a thoughtful approach to portfolio allocation and hedging to weather the potential storms ahead.
