Bernie Sanders is now favorite to clinch today's crucial Iowa vote. Wall Street analysts say the stock market hasn't priced in this huge potential volatility shock yet.
The Dow Jones Industrial Average (DJIA) opened strong on Monday even as China’s stock market haemorrhaged. U.S. traders shrugged off coronavirus fears, but there’s a bigger stock market trigger looming: Bernie Sanders.
In last-minute polls, the Vermont senator is emerging as the favorite to clinch the Democrat Iowa caucuses [Emerson College Polling] going into Monday’s vote.
According to a number of Wall Street analysts, traders are massively underestimating Bernie’s chance of winning the White House. Running on a platform of Medicare-for-all and energy regulation, the stock market risks a painful crash under his presidency [CNBC].
“If Bernie Sanders became president, I think stock prices should be 30% to 40% lower than they are now” – Hedge fund manager Stanley Druckenmiller, in June last year.
The Dow Jones [Yahoo Charts] jumped more than 100 points higher on Monday. This comes despite a bloodbath on the Asian markets overnight. Chinese stocks saw the biggest flash crash since 2015 as the markets reopened after Lunar New Year closure.
All eyes are on the ongoing coronavirus pandemic that is crippling the Asian markets. But the real threat to the Dow Jones and S&P 500 is uncertainty going into the 2020 presidential election [Wall Street Journal].
“The biggest risk this year is political risk” – Mark Giambrone, Barrow Hanley Mewhinney & Strauss LLC.
And chief among those risks is a Bernie Sanders nomination. Wall Street initially focused their fears on Elizabeth Warren, but left-wing Bernie is emerging as the Democrat front-runner. He’s tied with Biden nationally according to the latest Wall Street Journal / NBC poll. And he’s leading the pack in Iowa’s crucial caucuses today.
A Bernie nomination would be a huge drag on healthcare stocks, which make up 14% of the S&P 500.
With the Dow hovering just shy of its all-time highs, there’s little room for political shocks. Analysts say that Bernie’s nomination, and his political agenda, aren’t priced into this heated market [Market Watch].
“Market prices do not reflect a Sanders nomination, investors don’t think he’ll win… [If Sanders does win the Iowa contest] you may see markets react with volatility, especially in sectors like health care and energy” – Michael Arone, State Street Global Advisors.
We’re beginning to see this fear play out on the derivatives market. Bets on market volatility, via the VIX (volatility index) futures and options, are rising sharply going into the Iowa and New Hampshire caucuses. Traders are expecting fireworks.
“As it seems like Bernie [Sanders] gains in the polls … the market’s now implying a larger move” – Danny Kirsch, Cornerstone Macro.
The Iowa and New Hampshire contests have a strong sway on the presidential race, but the real test comes on March 3rd – Super Tuesday.
This article was updated at 9.34 am ET to reflect current prices.
This article was edited by Samburaj Das.
Last modified: February 3, 2020 2:34 PM UTC