If you’re inclined to check out your investment portfolio this week, you might want to do it with one eye open. The results of Tuesday’s U.S. midterm election is anybody’s guess and the stakes for the average investor are huge.
One thing for certain is the increased role politics has played in the markets since Donald Trump became U.S. president. His tax cuts have spark equity market rallies, his trade tirades have pulled them back, he’s called out individual companies for displeasing him, intentionally swayed the U.S. dollar in both directions, and is well on his way to politicising the U.S. Federal Reserve after criticising the central bank for raising interest rates. The Fed, by the way, is set to make another rate decision Thursday.
It’s hard to know what election outcome would be most favourable for the markets. A strong Republican showing could signal more business-friendly policies aimed at boosting corporate earnings. A strong Democratic showing could signal relief that Trump’s erratic behaviour will be kept in check.
Either way, any market veteran will tell you all the markets really want is certainty. A strong showing for either party could provide that certainty, but close results or calls of election tampering could tip the apple cart.
It’s times like these we turn to the Chicago Board Options Exchange Volatility Index. The VIX is a widely used measure of market risk often referred to as the "investor fear gauge" that shows the market's expectation of 30-day volatility. It uses the implied volatilities of a wide range of S&P 500 index options calculated by calls and puts.
The VIX is currently tame after a wildly volatile October, but with two market sessions ahead of the election, it could turn on a dime.
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