Markets

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

As with opposing candidates in an election, the differences in opinion among Wall Street strategists are often more interesting than the similarities. 

These days, however, analysts are sounding one similar note often enough that it warrants mention: There's a presidential election coming up, in case you haven't noticed, and stock-market investors should buckle up for a surge in volatility.

The race is starting to look more and more like a coin toss. Hillary Clinton and Donald Trump are deadlocked at 46 percent of likely voters in a head-to-head contest, and Trump has moved into a two-percentage-point lead when third party candidates are included, according to the latest poll by Bloomberg Politics. If you prefer the British bookies over polls, then a compilation on Oddschecker.com similarly shows nearly a tie when it comes to the number of bets placed on each candidate: 36.26 percent for Clinton, and 36.96 percent for Trump. 

The increasing uncertainty over the outcome suggests stormy weather is in the forecast for markets, according to some leading meteorologists. As the candidates prepare for a debate Monday night that many predict will grab Super Bowl-like ratings, there's little debate among Wall Street strategists the race is bound to stir up volatility.

Here's a sampling from some recent reports.

From JPMorgan Chase strategists led by Dubravko Lakos-Bujas: 

Presidential elections have historically had only minimal influence over US equity market performance and volatility. Despite this, 2016 election will likely be a source of heightened volatility in the weeks ahead of November 8th.

From David Kostin and colleagues at Goldman Sachs:  

Although the race has tightened, the VIX index sits at 12, sharply below its reading of 18 just last week. Equity market uncertainty typically rises in the month immediately ahead of presidential elections, and we believe the current below-average level of uncertainty is unlikely to persist.

From Mandy Xu and colleagues at Credit Suisse: 

As we approach the November 8th US Presidential election, it’s surprising that both VIX and VIX futures are so muted currently ... Historically, we find that elections have been a meaningful driver of equity volatility. For example, the VIX has gone up in the month leading up to the election every single time the past 6 elections (1992-2012), with an average increase of 3.5 vol pts. Looking back further at all post-war elections (1948-2012), we find that realized volatility is highest in October of an election year than any other month during election season (Jul-Nov).

This is all wonderful fodder for the cynics and contrarians out there. The cynics will insist that of course strategists are predicting more volatility, because that's what gets clients on the phone asking for more information about trading ideas. And the contrarians will surely note that, with everyone on one side of the boat, it's a good time to take a seat on the other side. 

But as you pop your corn for Monday's debate -- which Goldman Sachs is calling "the biggest match-up since the Mayweather/Pacquiao bout" -- it would be unwise to completely ignore these forecasts for increased volatility. 

Election or no election, this bull market is getting a bit moody in its old age as valuations swell, along with doubts about the further efficacy of central-bank actions. The S&P 500 has seen five extreme shifts in volatility in the past two years, matching the number that occurred in the prior two decades, as Bloomberg's Lu Wang reported on Monday. The genie of volatility is out of the bottle, and it would be foolish to think it's ready to head back in just yet. 

Swinging Into November
The VIX index of expected stock-market volatility has increased from September to October in every presidential election year except 1996, when Bill Clinton handily won re-election
Source: Bloomberg data

Still, it's important to keep the bigger picture in mind. The election very well could cause some drama in the stock market as November approaches, but maybe not the historic level of drama it's causing in politics. That's because there's a bit of symmetry between the two campaigns when it comes to what their policies could potentially mean for the market, as some of the strategists above have pointed out.

Both candidates are advocating for increased spending on infrastructure, which could benefit industrial, technology and raw-materials companies. Each is also stoking some caution toward health-care companies, with Clinton criticizing drug prices and Trump vowing to get rid of the Affordable Care Act. Both are also sending warning shots in the general direction of the financial sector.

The closeness of the race also suggests that, whoever wins, neither may have the full compliance of both houses of Congress. Any ambitious, transformational policy being promised may just be wishful thinking. 

For all the voter focus on the vast differences between the two candidates, the market may be more finely tuned to their similarities. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net