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Welcome to Charts that Count. Investors, among other people, are worried about the possibility of a messy and contested result of November's US presidential election. The S&P 500 has been drifting down ever since the index hit an unlikely all-time high early in September. It is impossible to estimate with any certainty how much of this downward drift is due to anxieties about a contested result now that the president has said, once again, that he believes the poll will be rigged and he might reject the result should he lose.
Equally, it is impossible to precisely estimate how much of the decline is down to the increasing probability of a Biden victory, an event that could herald a rollback of Trump's corporate tax cuts, which would almost certainly hit stock prices. But what we do know for sure is that the market is anticipating greater volatility around the time of the election.
This chart shows the price of futures on the VIX US stock market volatility index, and so the relative cost to investors of hedging against big moves in the stock market. The VIX Volatility Index currently stands at about 26. But as you can see, the cost to hedge spikes around the week of the election, and the cost of hedging at election time has only increased as time has passed. It stood at 29 in late August. It was over 30 in September and now stands at over 32.
But is there any good reason for investors with a longer term view to even care about the volatility that would come with a contested result? Or to put it slightly differently, shouldn't investors simply buy the dip if the two parties engage in a protracted legal battle? Unfortunately, there are good fundamental reasons to worry about this result because it could mean the delay of much needed further fiscal support as America faces the Covid-19 virus. That could have serious repercussions for the economy. Elections, at least sometimes, have consequences.
