VIX INDEX ‘FEAR-GAUGE’ TENDS TO RISE HEADING INTO US PRESIDENTIAL ELECTIONS AS EXPECTED MARKET VOLATILITY CLIMBS ALONGSIDE POLITI
VIX INDEX ‘FEAR-GAUGE’ TENDS TO RISE HEADING INTO US PRESIDENTIAL ELECTIONS AS EXPECTED MARKET VOLATILITY CLIMBS ALONGSIDE POLITICAL UNCERTAINTY
- S&P 500-derived VIX Index traditionally advances forward of US presidential elections
- Anticipated inventory market volatility possible accelerates with rising coverage uncertainty
- Donald Trump and Joe Biden are toe-to-toe within the newest November 2020 election polls
The VIX Index, sometimes called the fear-gauge by merchants, displays expectations for inventory market volatility over the subsequent 30-days. Anticipated market volatility is conceptually tied to the general stage of perceived uncertainty, which is usually elevated round high-potential impression occasion danger. One historic instance of that is how the VIX Index tends to climb heading into US presidential elections.
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VIX INDEX NORMALIZED TO ELECTION DAY (CHART 1)
On common, the VIX Index trades at the next stage on US election day when in comparison with readings taken within the 60-days previous to the November election date. Although this will not all the time be the case, and the variety of historic observations are restricted, the connection might broadly be defined by buyers hedging towards uncertainty and draw back danger that stem from potential political regime modifications. Anticipated inventory market volatility tends to begin stabilizing and retracing again decrease following the election, however that is much less more likely to happen if there’s a shift in social gathering management.
Trying on the 2008 election cycle, for instance, the VIX Index practically doubled within the two-month interval main as much as the November election date. The ‘fear-gauge’ continued climbing after the 2008 election, which revealed a change in political social gathering occupying the White Home from Republican to Democrat.
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The 2000 election cycle additionally gives an instance of the VIX Index rising within the days main as much as election day and advancing additional afterward as markets digested coverage modifications that accompanied a change in presidential management from Democrat to Republican. That mentioned, it’s value mentioning that the 2000 election and 2008 election each occurred round main monetary crises.
VIX INDEX LEVEL AROUND US PRESIDENTIAL ELECTIONS (CHART 2)
Volatility appears primed to rise over the approaching days and weeks because the November 03, 2020 election day approaches. That is contemplating the historic conduct of the VIX Index usually noticed throughout previous election cycles, in addition to the present geopolitical and financial panorama. The US economic system is coming off one of many sharpest downturns in fashionable historical past in response to the coronavirus lockdown earlier this 12 months, although latest financial knowledge factors to a sturdy restoration in enterprise exercise and employment.
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Additional, potential for heightened volatility across the 2020 presidential election is likely to be exacerbated by social distancing measures, which appears more likely to lead to a serious leap within the amount of mail-in ballots. The time-consuming technique of tallying mail-in ballots might draw out the election outcomes and bolster the sense of uncertainty which in flip additional lifts the VIX Index. It is a significantly amplified situation contemplating US President Donald Trump and former Vice President Joe Biden have been polling neck-and-neck in most 2020 election polls. In the end, this heightened uncertainty and ambiguity across the election’s precise final result has the potential to additional exacerbate inventory market volatility past simply November 3rd.
— Written by Wealthy Dvorak, Analyst for DailyFX.com
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