Up on optimistic headlines, down on uncertainty.
With investors’ eyes glued on Capitol Hill, the market’s gyrations have become commonplace in recent days.
“It’s all about fiscal stimulus,” Charles Schwab’s chief investment strategist Liz Ann Sonders tells Coins2Day, as negotiations between the White House and House Speaker Nancy Pelosi over a new stimulus deal come down to the wire. “That’s the factor I think is driving most of the intraday swings right now.”
On Tuesday, Speaker Pelosi signaled some progress over new stimulus as her deputy chief of staff Drew Hammill wrote, “Both sides are serious about finding a compromise” in a tweet Tuesday following a call between Speaker Pelosi and Treasury Secretary Steven Mnuchin.
That conversation came on the day of a deadline Speaker Pelosi set to get a deal on the table, though she appeared to walk back that hard deadline, aiming for a bill to be drafted by the end of the week. Republican senators led by Majority Leader Mitch McConnell pose a roadblock to passing the deal, however, as McConnell reportedly told the White House not to accept a Democrat bill before the election.
The daily back and forth has meant a rocky few days for investors. The S&P 500 is down 1.3% over the past five trading days, but closed roughly 0.5% higher Tuesday on hopes a deal was within reach. Still, intraday swings have been choppy over the past week; the Dow at one point on Wednesday fell 225 points in the span of an hour as the Cboe Volatility Index, or VIX, spiked. The big concern: Should a deal not get done soon, some Wall Street observers estimate as much as a 5% to 10% hit to markets.
Charles Schwab’s Sonders believes we’ll continue to see these “bouts” of volatility in the near-term tied to stimulus, but she argues another market-moving event is still on the horizon that could potentially fuel even more sustained volatility than stimulus negotiations: a contested election.
Market observers and strategists have been counseling clients on what a contested election might do to equities, and many dread what kind of volatility we’d see in the event of a dragged-out election decision. Some investors are also planning ahead, buying options and futures on a bet things will be volatile after Nov. 3.
“When you look at what’s been going on in the volatility futures, there had been an easing of concerns about a contested election. But when you get closer [to the election] as polls tighten, which is often the case, I think some of that uncertainty might increase again,” says Sonders. “Save for stimulus issues, I think that remains probably the biggest volatility driver between now and the election.”
What’s more, despite the hand-wringing on the Street, Sonders argues investors may not be fully appreciating the risk of a contested election dragging on as long as (if not longer than) the Bush-Gore contested election in 2000, when the winner wasn’t declared until roughly six weeks after Election Day. “I think that’s a volatility driver that’s not priced in,” she says.
Scott Knapp, chief market strategist at CUNA Mutual Group, concurs. He’s not convinced “the markets are anticipating a contested election right now, and for that reason, if one did occur, it would likely be a market-mover,” he wrote in a note Wednesday.
If there is a contested election, he reasoned, it would be similar to what has happened throughout 2020 “of actual events differing from expectations.”
“It would be a low-probability event that produces a very negative market-moving surprise,” Knapp argued.
The bottom line for investors? “A more elevated and sustained level of volatility probably comes if we have a contested election issue, especially if it’s a protracted one,” Sonders says. Indeed, other strategists like Charlie Ripley, senior investment strategist for Allianz Investment Management, expect “markets to maintain an elevated level of volatility leading up to, and possibly beyond, the November 3 election day,” he wrote in a note Tuesday. “We’ve been saying it’s not so much who gets elected but more so how that takes place,” he told Coins2Day Wednesday.
As for this week, Sonders suggests investors keep an eye on the presidential debate on Thursday, which could possibly shift poll numbers or the betting market.
“That could be a volatility driver or a market mover,” she adds.
More must-read finance coverage from Coins2Day:
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- “A tale of two Americas”: How the pandemic is widening the financial health gap
- A disputed election could cost the U.S. Its “AAA” credit rating
- As earnings season kicks off, only 48% of companies have resumed giving investors guidance