Stock Investors' Bets Eye a Biden Victory, Robust Stimulus
October 27 2020 - 5:59AM
Dow Jones News
By Gunjan Banerji
Despite the steep stock-market selloff Monday, investors appear
to be positioning for a speedy outcome to the presidential contest
and dwindling volatility through the end of the year.
U.S. stocks, particularly those in sectors most sensitive to
higher economic growth, have ascended in October, while Treasury
yields have jumped as bond prices have fallen. Bets on volatility
falling through the end of the year in the derivatives market
picked up, after months of investors positioning for rocky markets
into January.
Value stocks -- shares of companies that typically trade at a
low multiple of their book value, or net worth -- have
outperformed. The S&P 500 Value index has advanced 1.6% in
October, beating the S&P 500 Growth index's 0.8% gain. The
value index is on track to beat its counterpart for the second
consecutive month, something that hasn't happened all year.
Those market moves suggest investors are taking their cues from
polls showing former Vice President Joe Biden with a steady lead
over President Trump, which increases the chances of a decisive
victory. They also see a robust fiscal stimulus plan in the cards.
Although other dynamics are at play in markets, ranging from the
Covid-19 caseload to the vigor of the global economic recovery,
many investors say increased expectations for an orderly U.S.
election season have been among the key developments in recent
weeks.
"They no longer think the election is going to be something that
takes us a long time to figure out," said Amy Wu Silverman, a
managing director at RBC Capital Markets. "People are expecting
good news out of the fiscal stimulus as well as the vaccine."
Many investors had been betting on prolonged uncertainty after
the election in anticipation of a surge in mail-in voting that
would leave the outcome undecided for weeks.
On Monday, as U.S. stocks fell sharply and the Cboe Volatility
Index, or VIX, climbed, some investors positioned for its fall
through bearish options on the gauge, Trade Alert data show. A
bearish bet on the VIX is akin to a bullish bet on the S&P 500
because the two tend to move in opposite directions.
"It's been a very popular trade to position for volatility to go
lower after the election," said Christopher Murphy, co-head of
derivatives strategy at Susquehanna Financial Group, adding that
these bets appeared resilient even during the stock-market selloff
on Monday.
The recent jump in the stock market's laggards, including
financial shares, comes as analysts have said that a Democratic
sweep of the White House and Congress could benefit the economy and
markets. Goldman Sachs Group Inc. analysts said earlier this month
that a Democratic sweep could be a positive for stocks. UBS Group
AG echoed that sentiment Friday, saying a "blue wave or status quo
outcome would likely be modestly better for stocks because it would
lead to larger fiscal support."
Business leaders have also embraced the prospect of a Biden
presidency, despite his push to increase taxes on corporations and
wealthy individuals. Their stances highlight the importance of
fiscal stimulus and how the coronavirus pandemic's impact on the
economy supersedes many other factors. Democratic lawmakers in
Congress have been pushing a $2.2 trillion stimulus package to
combat the virus, much larger than Republicans' proposal.
Republicans are often thought to be friendlier to the stock
market because of their policies on lower taxes, though stocks have
tended to go up regardless of which party controls Washington. Mr.
Trump's tax cuts, for example, helped boost the stock market early
in his presidency. But that calculus has shifted ahead of the
coming election, in part because many believe that more fiscal
stimulus is needed to help the economic recovery.
In some cases, investors say the idea of a speedy resolution to
the election is more comforting than a lead in the polls by a
particular candidate. Still, there remain countless unknowns about
how the election will affect policy on everything from taxes to
climate change and financial regulation.
The recent trading activity also highlights investors'
confidence in such polling, despite several political surprises in
2016, such as Mr. Trump's victory and Brexit.
"There's been kind of a revisiting of the sense that the
objective read of the polling is the right way," said Josh Younger,
a managing director at JPMorgan Chase & Co. "The wider the gap,
the more decisive the victory."
Mr. Younger said it has recently gotten cheaper to pick up
options around the presidential election.
Other traders caution anxiety surrounding the election hasn't
dissipated entirely, and the VIX has remained elevated even as
stocks have climbed this month. On Monday, it jumped to the highest
level since early September.
Even some investors who had piled into exchange-traded funds
that would benefit from a victory for Mr. Biden appear to be
hedging their bets. Solar stocks and other alternative energy
shares had surged in recent weeks, partly thanks to the expectation
that they would benefit from Mr. Biden's $2 trillion package to
combat climate change.
But bearish put options outstanding tied to the Invesco Solar
ETF recently surged to the highest level of the year, Trade Alert
data show, while the fund fell the most in a single day since
March. Such contracts allow investors to sell the shares at a given
price, later in time and are often used as hedges.
The chance that "there is a more chaotic outcome -- that
probability hasn't gone away," said Parag Thatte, a strategist at
Deutsche Bank. "The fear of that outcome has gone down."
Write to Gunjan Banerji at Gunjan.Banerji@wsj.com
(END) Dow Jones Newswires
October 27, 2020 05:44 ET (09:44 GMT)
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