As Donald Trump and Hillary Clinton march into the final stage of their highly controversial presidential campaigns, equity markets are ripening for a colossal shake-up leading up to Election Day.
With radically different views from each candidate on how to handle international trade, fiscal policy reform, immigration and general economic themes, a controversial election outcome may control the fate of our stock indices. Volatility is the name of the game as we move into election season, and we can rely on a specific ETF (Exchange Traded Fund, which is simply a fund created to behave like a certain index or collection of assets and traded like a stock) to track these swings in the market. The Chicago Board of Options Exchange Volatility Index (VIX), also called the ‘fear index’, is a wildly popular investment tool that seeks to capture expected stock market volatility over the next 30-day period.
Markets tend to respond naturally to election outcomes that are easier to predict; this year will be a completely different story. Millions of Americans are unsure if either major party candidate is fit to hold the office of the president. If there is anything we can be certain of regarding the 2016 Presidential election, it’s, well, uncertainty. Off-kilter remarks, mudslinging and shifts in the polls will all contribute to impulsive private investment decisions. As a result, VIX could see a significant uptick in price while investors sort out what a Trump/Clinton presidency means for the health of the economy.
The fear index will reflect heightened uncertainty leading into the final weeks of their campaigns. Volatility tends to stay quiet during election years in which winners are easy to predict. For example, when it is clear that an incumbent president will return for another term. Now we have two high profile candidates that spend more time attacking each other than the issues facing our country. Investors have no idea how to respond, and this implied uncertainty will contribute to a historic pop in VIX price.
To give this some context, when John McCain and Barack Obama were vying for the Presidency in 2008, VIX increased from $39.39 on Oct. 1 to $63.68 on Nov. 7, just three days after the general election. In other words, the volatility realized during election season caused the ETF’s price to jump 61.66 percent. An investor who purchased 100 shares of VIX on Oct. 1 would have yielded a gain on investment of $2,429 just a few weeks later.
October promises to give us entertainment if nothing else. The next two debates will likely contain more memeable moments than presidential ones. Markets are poised to run haywire if left without any clear direction from the candidates on how they will continue to steer our economy in the right direction.
In the meantime, VIX will tell the story of perceived market volatility as investors are left to wonder what the fate of the American economy will be come Nov. 8.