By Paul R. La Monica
Investors are on edge as Americans head to the polls. A popular barometer for market volatility that is often dubbed Wall Street's "fear gauge" was at a higher than usual level just before Election Day, a sign of just how anxious traders are regarding the outcome of a presidential race that appears too close to call.
The Cboe Volatility Index, or VIX, ended Monday at a level of around 22. According to analysis from DataTrek Research, the VIX was only in the mid-to-high teens just before the 1992, 1996, 2004, 2012 and 2016 presidential elections. (It dipped back toward 20 on Tuesday morning as stocks rallied.)
The only times the VIX was higher right before an election in recent times was when there was some sort of market meltdown. The VIX was around 25 in November 2000 amid a bear market, after the dot-com bubble burst and tech stocks had imploded. The index hit nearly 56 in the midst of the 2008 financial crisis -- and was 37 just before the 2020 election during the Covid pandemic.
Investors may need to prepare for the VIX to head even higher. Many political experts are predicting that it could be a few days -- or longer -- before a winner of the presidential race is declared.
That may make the market even more nervous.
"We could see a jolt of volatility and a knee-jerk reaction once there is more clarity on the election outcome or if the election results take longer to be known," said Keith Lerner, co-chief investment officer at Truist Wealth, in a Monday report.
But this unusual level of volatility, which Nicholas Colas, co-founder of DataTrek Research, chalked up largely to uncertainty surrounding the election outcome, could be a buying opportunity for stocks, particularly those with large market capitalizations.
"We continue to believe US equities will rally into year end," Colas wrote Tuesday, adding that earnings growth for the rest of this year and 2025, especially in the tech sector, should justify a higher stock market -- even though valuations are pricier than historical averages.
"US large caps are indeed expensive. They have, however, earned their way into that premium over many years and we have trouble imagining a catalyst that will reverse this trend any time," Colas wrote.
Small-cap stocks, which have gotten a boost in the past few months, may continue to rally even if there is some short-term election uncertainty. Both Vice President Kamala Harris and former President Donald Trump are likely to push for more fiscal stimulus so as to boost economic growth, which could benefit smaller companies more than it would larger ones. Many firms in the Russell 2000 and S&P 600 small-cap indexes have more exposure to the domestic economy than the multinationals in the S&P 500 and Dow Jones Industrial Average.
Brian Burrell, a portfolio manager at Thornburg Investment Management, said in a report Monday that "we have small-cap stocks in the US outperforming on the strength of the domestic economy from the stimulus that would occur."
But Burrell also thinks investors shouldn't ignore larger stocks, noting that they should hold up better if it isn't immediately clear who the 47th president of the U.S. will be.
"We've chosen to position our portfolios with companies whose fundamentals do not hinge on election outcomes to a great degree, or where there is not as much earnings uncertainty in the near term," he wrote.
Truist's Lerner agreed that investors should stay calm and stick to their plan. "Continue to focus on the primary trend and try to filter out the short-term noise," Lerner wrote.
In other words, try and find stocks trading at reasonable valuations with solid potential for earnings growth. They should hold up fine -- no matter if Washington, D.C., sees a red wave, blue sweep, or divided government.
Alex Morris, CEO of F/m Investments, said in a recent interview with Barron's that even though there could be market choppiness until the election outcome becomes clear, megacap tech stocks like Nvidia, Microsoft, Apple, and Meta Platforms, should outperform.
"Dance with the one that brought you," Morris said . "We boringly like the big names because they're good companies."
So don't make wholesale changes to a long-term investing strategy because of the political landscape.
Write to Paul R. La Monica at paul.lamonica@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 05, 2024 12:02 ET (17:02 GMT)
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