One Measure of Risk Just Hit Its Highest Level in Four Months

  • CBOE put/call ratio jumps, matching a four-month high
  • Scrutiny on Clinton e-mails spurs craving for protection

Preparing for Market Black Swans in U.S. Election

As the presidential election race narrows after Friday’s surprise FBI announcement, stock investors are finally showing some jitters.

Hedges against a market decline surged immediately following reports that the Federal Bureau of Investigation is reviewing files that may be related to an investigation of Hillary Clinton’s e-mail practices when she was secretary of state. The ratio of bearish versus bullish options changing hands on the Chicago Board Options Exchange jumped the most since June to match a four-month high.

After falling 20 points in 40 minutes following the news on Friday, the S&P 500 Index slipped less than a point to 2,126.15 at 4 p.m. in New York. It wandered today in its narrowest range in seven weeks while capping a third straight monthly decline, its biggest since a plunge in January.

While the benchmark for American equity remains mired in its tightest range since 2006, investors are bracing for an end to malaise that sent a cross-asset gauge of price swings to the lowest since 2014. Just four months removed from the U.K.’s shock decision to leave the European Union in an outcome not predicted by betting markets, anxiety levels have spiked in the final week of an election season marked by twists that have seen Clinton’s once dominant lead over Republican Donald Trump wither in the latest polls.

“It’s natural for an institution to want to put some hedges on, given how close the election is and how much uncertainty has arisen recently,” John Fox, director of research at Fenimore Asset Management Inc. in Cobleskill, New York, who helps oversee more than $2 billion, said by phone. “We’ve also heard plenty of talk from individual retail investors that they want to be protected heading into next Tuesday. We got a great lesson from the U.K. that polls can be wrong.”

The CBOE Equity Put/Call Ratio climbed to 0.78 on Friday, the highest since June and also matching a level reached in September. The measure has seen an average of 0.63 since July 8, a period over which the S&P 500 has been locked in a 64-point range.

Open interest on put contracts for the SPDR S&P 500 ETF has swelled to about double the same measure for calls, close to the most since April, according data compiled by Bloomberg. That’s high relative to the the average ratio of 1.75 for the past six months.

Beyond politics, investors weighed data on consumer spending, which did little to alter interest-rate bets as the Federal Reserve prepares to meet, while fresh deal-making boosted industrial shares. Despite the session’s muted moves, the CBOE Volatility Index rose 5.4 percent, bringing its October climb to 28 percent, the most since August 2015.

“Investors will try to digest the implications of the latest twist in the U.S. election theater and will focus on Wednesday’s Fed meeting,” said Ralf Zimmerman, an equity strategist at Bankhaus Lampe KG based in Dusseldorf, Germany. “Earnings are stabilizing and picking up a bit but valuations are stretched.”

The S&P 500 has been stuck in a trading range after reaching a record in August, as investors assess the political landscape, the likely trajectory of interest rates, corporate profits and economic data. It hasn’t climbed for three consecutive sessions in more than a month, oscillating between daily gains and losses, while trading at close to 18 times forecast earnings, the highest since 2009.

In Monday’s trading, Baker Hughes Inc. fell as crude oil dropped to a one-month low, erasing an early gain after General Electric Co. agreed to combine their oil and gas businesses, the latest in a series of deals that has October on pace for the busiest month for mergers and acquisitions in at least 12 years. Level 3 Communications Inc. climbed to a three-month high after agreeing to a $34 billion cash-and-stock takeover offer from CenturyLink Inc., which dropped the most since 2013.

Among companies moving on earnings news, Zimmer Biomet Holdings Inc. tumbled the most since 2007 after trimming its outlook, dragging health-care shares lower. Loews Corp. saw its biggest jump in five years as its profit surged on improved results at insurance unit CNA Financial Corp. The Dow Jones Industrial Average fell 18.77 points to 18,142.42. About 6.8 billion shares traded hands on U.S. exchanges, 4 percent above the three-month average.

Data today showed consumer purchases climbed in September by the most in three months as incomes grew, signaling momentum in the biggest part of the U.S. economy. Investors will also look for signs of stronger growth this week in gauges on manufacturing and monthly payrolls. The odds on a December rate increase are 71 percent. Traders are pricing in a 16 percent chance the central bank will act this week before the Nov. 8 presidential election.

“I think that the market is focusing on fundamentals and the fundamentals are relatively good,” said Kevin Caron, a Florham Park, New Jersey-based market strategist and portfolio manager who helps oversee $180 billion at Stifel Nicolaus & Co. “We’re going to get employment data at the end of the week which will probably tell us that the economy is in growth mode. It’s been positive, it’s been steady and this morning’s numbers contribute more to that picture.”

With more than half of S&P 500 members having reported quarterly results, analysts now expect earnings growth of 1.6 percent for the benchmark, reversing forecasts for a 1.6 percent decline at the start of the month. If the prediction holds, it will end the longest earnings recession since the financial crisis. Companies releasing results this week include Pfizer Inc., Gilead Sciences Inc., Facebook Inc., Kraft Heinz Co. and Starbucks Corp.

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