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S&P 500, Dow Brace for ‘October Storm’ as Biden Loses Momentum

Sam Bourgi
Last Updated September 23, 2020 2:26 PM
  • The S&P 500 Index closed at 3,389.78 on Tuesday, a new all-time high.
  • Investors are bracing for a highly volatile election cycle, setting the stage for a massive selloff in the fall. The selloff may extend beyond the election date if the results are contested.
  • Joe Biden’s lead in the average polls appears to be slipping, a sign that Democrats are losing momentum.

The U.S. stock market’s marathon recovery since the spring is about to face some severe resistance as investors hedge against a volatile election cycle. An analysis of S&P 500 futures and the CBOE Volatility Index suggests October could be a bumpy ride for equities.

s&p 500 index
The S&P 500’s ‘V-shaped’ recovery is losing steam. | Chart: Yahoo Finance 

Investors Brace for Volatility

The November election is already causing investors to fret over prolonged uncertainty–even after the vote is cast.

Julian Emanual, the head of equities and derivatives at BTIG, told CNBC :

If you look at the back and forth between the two political parties, it’s entirely clear that there may be a period of time after Nov. 3 where we really don’t have clarity as to who is going to be the occupant of the White House on Jan. 20, and that is new.

Despite the record rally in stocks, investors have been “hedging more than usual,” according to CNBC, because the election result could trigger a big selloff and higher volatility. S&P 500 futures suggest investors have been making negative bets on the market for November and December.

Volatility is expected to rise in the lead-up to the election, setting the stage for an ‘October storm.’

October options on the CBOE VIX, the so-called “fear index,” are priced at $29.90. That’s much higher than the cash price, which is around $23.00 . The November contract is priced at $29.10 and the December contract at $28.25.

cboe vix futures
October futures on the VIX are trading at a premium. | Chart: Vixcentral.com 

The CBOE VIX trades on a scale of 1-100, with 20 being the historical average. Anything above 20 signals higher than usual volatility. The fear gauge peaked in the mid-80s back in March and has traded above the long-running average ever since.

September Is the Worst Month for Equities

It doesn’t help that September is, on average, the worst month for stock prices . Watch the video below for more details.

Since 1937, the S&P 500 Index has declined by an average of 1% during September. The Dow Jones Industrial Average has recorded a similar drop, while the Nasdaq Composite Index loses an average of 0.5%.

The so-called ‘September Effect’ is a market anomaly that seems to occur independently of news or market cycles. It could be tied to behavioral biases, a resurgence in trading volume after the summer, or mutual funds cashing out their holdings for tax purposes.

Analysts say the September Effect isn’t as dramatic as it used to be, with losses to the S&P 500 limited to roughly 0.4% over the past 25 years .

Biden, Democrats Losing Momentum

Joe Biden’s lead over Donald Trump has narrowed in the polls, possibly signaling a highly contested election come November. Although surveys proved meaningless in the 2016 election cycle, they provide some insight into where segments of the population are leaning.

Average polling data collected by RealClearPolitics.com show Biden’s lead over Trump has narrowed to just 7.6 points, down from 10 points in early summer.

The Rasmussen poll is the narrows, with Biden leading by just 4 points.

Trump vs Biden
As many expected, the gap between Biden and Trump is narrowing. | Chart: RealClearPolitics.com 

An uncertain election adds to the myriad of worries investors have to deal with this fall. The coronavirus pandemic is expected to see another wave come autumn, which means the economy will struggle to come out of recession.

Jobless claims topped 1 million last week  after falling below that level for the first time since March. While applications have declined sharply since the spring, they are still well above the historical average–and way above where they were in February.

President Trump has signed executive orders to extend additional unemployment benefits, but congressional bottlenecks have stalled their implementation.