Historic Volatility, Election Uncertainty, & The Fed’s Dilemma | ETF Trends

By Marc Odo, CFA®, CAIA®, CIPM®, CFP®, Swan Global Investments

2020 has been an incredibly unpredictable year—but it’s not over yet. As we enter Q4, another rise in COVID-19 infections seems imminent, uncertainty surrounding the election’s outcome is rising each day, and Congress remains at a stalemate when it comes to a highly anticipated pandemic relief package.

Since the start of September, it’s been extraordinarily difficult for rallies to take hold in the markets. Additionally, market volatility this year has reached levels seldom seen before. In 2020, the S&P 500 had 13 of the 20 largest daily point losses in history, but also 14 of the 20 largest daily points gains, according to Statista. And September was no different—all month long, stocks have endured rollercoaster trading sessions with major indexes jerking up and down, which begs the question: How far do stocks have to fall for Washington to act?

The stock market has been unpredictable, but anyone who was hoping for a quick economic recovery has likely been disappointed as the signs look eerily similar to those of 2009. Unemployment numbers are cemented at 870,000, and the Fed has run out of bullets with rates at zero, leading to increased calls from Fed officials for additional support from legislators in Washington to avoid a stalled and uneasy economic recovery.

When Fed Chair Jerome Powell testified before the House of Representatives in late September, he practically begged Congress to do its job. For too long, it appears that Congress has passed a significant portion of economic responsibilities to the Fed, but there’s a limit to how much monetary policy can do to prop up the economy, especially with rates as low as they are. Unfortunately, it looks as if both sides of Congress seem content to wait for the Fed to cushion the markets yet again.

On the pandemic relief front, both Republicans and Democrats have been playing a game of “chicken.” Following the passing of Supreme Court Justice Ruth Bader Ginsburg, Congress has completely shifted its focus to filling her seat. The $600 weekly unemployment stipend expired almost two months ago and many signs of financial distress—delinquent credit card payments, late mortgage payments, missed car payments—are on the rise. With just a few weeks to go until Americans hit the polls on November 3, this is a dangerous game to be playing.

As for the high-stakes election, increasing concerns over its validity will likely begin to arise in the markets as Wall Street weighs the probability of a contested result.

It is highly likely that, with the expected influx of mail-in voting, November 4 could pass without a clear winner in the presidential election.

It is worth noting that as we inch closer to the 2020 election, the options markets are showing heightened levels of anticipated volatility—not just through the general election but through the end of the calendar year. This indicates that investors are worried we won’t have a clear-cut winner the morning of November 4 and we might be in for some choppy waters before the results get sorted.

With all of this in mind, investors must also consider the potential of what many experts are saying will be a “lost decade” for returns. Long-term investors would be wise to prepare their portfolios by using risk-managed strategies to protect their capital in this high-risk and uncertain environment. At Swan, we do this by remaining always hedged through options while staying always invested in low-cost equity ETFs to capture the upside.

The result is a smoother ride with consistent returns for investors regardless of the markets’ up and downs.

Marc Odo, CFA®, CAIA®, CIPM®, CFP, is the Client Portfolio Manager at Swan Global Investments, a participant in the ETF Strategist Channel.