Below-norm volatility at this juncture may stem from investors’ knowledge that any change after the vote won’t be felt in markets until well into 2017, according to Jim Caron, a senior fixed-income portfolio manager at Morgan Stanley Investment Management, which oversees about $400 billion.
“The markets are seeing this event and saying ‘Yes, we understand the election is the second Tuesday in November, but the reality is that the economic impact is almost one year forward from that date,’” Caron said. “From an economic perspective, both candidates will give you fiscal stimulus. But you are talking 2017 until there is any package.”
By contrast, investors were heavily hedged going into June’s Brexit referendum, even though polls predicted the U.K. would remain in the European Union, an outcome that wasn’t expected to roil markets. A spread monitored by equity options traders to track demand for protective hedges -- implied versus realized volatility on the S&P 500 -- widened to a record in the days leading up to the vote as share prices climbed.
Under the surface, there are signs that U.S. money managers are starting to get more cautious. Fixed-income investors parked more of their assets in cash than at any point over the past 15 years in July, while shifting into shorter-maturity debt, according to data compiled by Bank of America and Bloomberg. Recent surveys should only ratchet up concern.
In an average of polls collected by RealClearPolitics, Clinton, the Democratic Party nominee, holds just a 3.3 percentage point advantage over Trump, her Republican rival, down from 7.9 percentage points less than a month ago. PredictWise, an aggregator of betting-market data, gives Clinton a 74 percent chance to win the election, compared to 81 percent odds three weeks ago.
Beyond the presidential race, the eventual makeup of Congress, comprised of the House of Representatives and the Senate, will also determine how successful Democrats and Republicans will be in getting their agendas passed in the new year. The last six years of President Barack Obama’s term have been marked by gridlock after Republicans took control of the House in 2010 and Senate four years later.
Democrats need a net gain of four or five seats to secure Senate control, depending on whether Trump or Clinton wins the White House. They now hold 46 seats, if two independents who caucus with Democrats are included, while Republicans control 54.
“The only thing we really know for certain about U.S. elections since 1960 is that markets hate a tight race,” said Woo.
This article was provided by Bloomberg News.