Investors are bracing for an extended period of market volatility as worries over a potential resurgence in coronavirus cases and political uncertainty roil stocks.
The Cboe Volatility Index, known as “Wall Street’s fear gauge,” hit its highest level in nearly two weeks as concerns over waning fiscal stimulus and the long-term economic consequences of the coronavirus pandemic took the S&P 500 down to a seven-week low on Monday.
Market participants aren’t expecting the turbulence to die down any time soon.
VIX futures show that investors are betting that market swings will persist beyond the Nov. 3 U.S. presidential election and into December, reflecting worries about the possibility of a contested election and concerns that a deeply divided government will fail to agree on providing more fiscal stimulus to support the U.S. economy.
Other possible stumbling blocks for U.S. stocks include re-escalating tensions between the United States and China, as well as a potential increase of global coronavirus cases that could once again lead to broad economic shutdowns.
The ramped up concerns are a sharp departure from the summer months, when signs of healing in the U.S. economy and expectations of more fiscal stimulus took markets to record highs after their brutal March sell-off.
“There are a lot of different unknowns out there, and we just don’t know what that translates into,” said Oliver Pursche, president at Bronson Meadows Capital Management. “That’s going to stick with us a little bit longer.”
Concerns over U.S. political uncertainty have recently been sharpened by the death of Supreme Court Justice Ruth Bader Ginsburg, which observers expect to deepen partisan divides as it sets up what promises to be a fierce fight in the Senate over President Donald Trump’s eventual nominee to replace her.
Such a battle could hamper the bipartisan effort needed to pass additional federal coronavirus relief. Federal Reserve Chair Jerome Powell, among others, has stated that the U.S. economic recovery requires additional fiscal support. Such measures have been built into many economic and market forecasts for next year, and its continued absence could lead to further pullbacks in U.S. equities, some investors say.
“It’s very hard to see how a compromise on another stimulus bill is reached in the next six to eight weeks,” said Charles Lemonides, portfolio manager of hedge fund ValueWorks LLC.
Lemonides is betting on declines in the stocks of several financial companies, including Wisdom Tree Investments Inc WETF.O and Cohen & Steers Inc CNS.N, which he believes are trading at valuations that assume a steep improvement in the economy.
Ginsburg’s death could also weigh on shares of managed healthcare companies as it increases the likelihood that the Affordable Care Act could be struck down, according to a note from UBS Global Wealth Management.
A new challenge to the law comes before the Supreme Court in November. The health care sector already trades at its largest valuation discount to the S&P 500 in at least 30 years, a report from Goldman Sachs said last week.
More broadly, however, “it’s not just Election Day that matters to this market,” said Stacey Gilbert, portfolio manager for derivatives at Glenmede Investment Management. “It’s also ‘do we get fiscal stimulus or do we not?’”