NEW YORK (Reuters) – Wall Street faces a tough time ahead of election day, with growing concerns over the Washington outcome strengthening nerves over the coronavirus pandemic and diminishing the chances of a revival.
The Cboe Volatility Index, Wall Street’s “fear gauge,” jumped to 32.46, its highest closing level since September 3, while the S&P 500 saw its biggest drop in a day , investors reluctant to buy before the vote.
“What we’re seeing today are people getting ready for election night: raising cash to preserve capital, locking in capital gains at a lower rate, and having cash for the growing possibility of lower prices, ”said Robert Phipps, director at Per Stirling Capital Management in Austin, Texas.
Investors have bet on a victory for Democratic challenger Joe Biden by buying alternative energy stocks and cannabis stocks, which should benefit from his policy proposals. Bond yields climbed, in part in anticipation of a larger stimulus under a Biden administration.
Some of those bets looked a bit lower on Monday. For example, the Invesco Solar ETF fell 2.1% and bond yields fell.
Prior to Monday, investors appeared to be backing down on election-linked volatility bets in hopes of a clear victory. However, with the decline in stocks, VIX futures have risen alongside the volatility index.
Today, market watchers fear that an unexpected victory for President Donald Trump, a Republican, or an uncertain election result may force a drastic unwinding of positions similar to what happened in 2016, when investors were overwhelmingly positioned for a Hillary Clinton presidency.
Biden still leads national opinion polls by 7.9 percentage points, although Trump has bolstered his position in the battlefield states of Georgia and Michigan, according to poll aggregator RealClearPolitics.
A surprise Trump victory could lead to a post-election leap similar to 2016 here, when a rally of drugmakers and financials helped reverse deep losses overnight and push the S&P 500 upwards more than 1%, the onset of an outbreak. the end of the year.
JP Morgan analysts said on Monday that the best outcome for stocks is a “orderly” victory for Trump, with the S&P 500 potentially catapulting to 3,900. A divided government could be a net positive, they said, while ‘A democratic White House and Congress would be neutral, with the potential for a larger stimulus weighing against higher corporate taxes.
Signs of a close election tend to lead to more volatility as Election Day approaches, said King Lip, chief strategist at Baker Avenue Asset Management in San Francisco.
“The polls seem to be shrinking… and what it’s causing is just more uncertainty,” he said.
Overall, the S&P 500 is up around 5% year-to-date and remains around 5% below its high in early September. Since then, a widely awaited fiscal stimulus bill in Washington has stalled and the United States has posted its highest number of new coronavirus cases here.
The sharp declines in the stock market on Monday have “to do with the lack of a stimulus package and concerns about the upcoming election,” said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York. “There is nervousness over these two issues.”