In the US Presidential Election's Tight Race... Markets Investing in 'Fear'

VIX ETF Average Daily Trading Volume 5 Times Higher Than Early This Year
Close Race Dynamics Persist Two Weeks Before Election

As the U.S. presidential election this November unfolds into a tight race until the very end, more investors are betting on 'fear.'

Vice President Kamala Harris (left), a candidate in the U.S. presidential election, and former President Donald Trump [Image source=AFP Yonhap News]

The Nihon Keizai Shimbun (Nikkei) reported on the 23rd that ahead of the U.S. presidential election, trading in products betting on the rise of the Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as the "Wall Street fear index," is active. The trading volume of the exchange-traded fund (ETF) "2x Long VIX Futures ETF," designed to reflect twice the movement of VIX futures, has increased more than fivefold in average daily volume compared to January this year. ETFs that move 1.5 times the VIX futures have also seen their trading volume double since the beginning of the year.

This is analyzed as investors betting on market volatility and fear regardless of the election outcome in a situation where predicting the winner is difficult. Nikkei stated, "It is still hard to grasp the impact on the market in this unprecedented close race," adding, "Money is flowing into Wall Street's volatility index investment, the so-called fear index investment, which can generate profits regardless of the result." For example, if Vice President Kamala Harris is expected to win, investors might buy renewable energy stocks, and if former President Donald Trump’s chances are higher, energy-related stocks might be favored. However, at present, it is difficult to favor either side.

The VIX index, calculated from the option prices of the S&P 500 index listed on the CBOE, indicates expected future stock price volatility. It tends to rise when price trends become unclear due to financial crises, wars, or disasters. Bloomberg News and Nikkei explain that typically, as the election day approaches, investor anxiety increases, causing the VIX index to rise, and it falls after the voting and counting. In past U.S. presidential elections in 2016 and 2020, the VIX index rose starting two months before the election and peaked a few days before election day.

According to option position data from Barclays strategists, traders expect the S&P 500 index to move about 1.8% in either direction on November 6, the day after the election. IG Bank commented, "In years with U.S. presidential elections, price volatility tends to be higher than in other years," adding, "Especially just before and after the election, volatility tends to increase. This presents a great opportunity for investors."

The expected volatility of U.S. Treasury prices also reached its highest level in 10 months on the 22nd (local time). The MOVE index, which can be considered the VIX index of the bond market, has historically risen by an average of 4 points in October of election years since 1988 and then fallen by 7 points in November. Harley Bassman, partner at Simplify Asset Management, stated that investors in the options market expect bond prices to move 18 points immediately after the election.

With the election day just two weeks away, Vice President Harris and former President Trump continue their fierce contest. According to a nationwide poll (margin of error ±2 percentage points) conducted by Reuters and Ipsos from the 15th to the 21st among 4,129 adults across the U.S. and released on the day, Vice President Harris holds a slight lead with 46% support compared to former President Trump’s 43%.

However, analyses suggest that the traditionally Democratic "base" Latinx voters are shifting toward former President Trump. In a poll released the previous day by USA Today (margin of error ±9 percentage points), 49% of Latinx voters supported former President Trump, outpacing Vice President Harris’s 38% by 11 percentage points. In the 2020 election, 63% of Latinx voters supported the Democratic candidate, President Biden.

On the cryptocurrency-based political betting site Polymarket, former President Trump’s winning probability was recorded at 64.9% in the afternoon, surpassing Vice President Harris’s 35.2%. However, the betting site has raised concerns about possible manipulation due to suspicious large bets observed from some accounts.

Meanwhile, with former President Trump’s support rising again after a dip following the Democratic candidate replacement, a "Trump trade" phenomenon is emerging on Wall Street. The market capitalization of Trump Media has tripled since the end of September, and on this day, former President Trump re-entered the Bloomberg Billionaires Index’s list of the world’s top 500 richest people for the first time in about two months.