Investors are currently grappling with U.S. economic uncertainty, shifts in Federal Reserve policy, and the upcoming presidential election—all contributing to a heightened demand for portfolio hedging and diversification.
The Cboe Volatility Index (VIX), a key gauge for measuring protection against stock market fluctuations, has climbed to around 20, a significant rise from its 2024 average of 14.8. This surge in volatility is a typical pattern during election years, as investors weigh the market implications of policy proposals from candidates, according to Reuters.
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However, this year, political concerns are colliding with other volatility drivers, including fears of a weakening U.S. economy and uncertainty over whether the Federal Reserve will cut interest rates. The S&P 500 recently experienced its worst weekly percentage loss since March 2023, largely driven by a second consecutive disappointing jobs report.
Despite the S&P 500 being up nearly 15% this year, the market remains precarious. Matt Thompson, co-portfolio manager at Little Harbor Advisors, noted, “The market is essentially saying, we know risk is elevated, but … we don’t know what the problem is going to be.”
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With volatility already elevated, the typical “election bump” in October VIX futures (which include the Nov. 5 vote) is smaller than in previous election cycles. The gap between the contracts with the highest and lowest volatilities is barely over 1 volatility point.
Recently, investors have zeroed in on the VIX, especially after its largest-ever one-day spike on August 5, which occurred during a sharp market sell-off. Although volatility stabilized shortly after, the index has once again climbed as the market has grown more turbulent.
Societe Generale analysts recently advised investors to maintain hedge positions for the next three to six months, citing potential volatility from economic surprises, geopolitical risks, and the looming U.S. election.
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The upcoming presidential election is amplifying uncertainty among investors. A CNBC survey revealed that 67% of investors believe that former President Donald Trump would be more favorable for the stock market. Historically, the S&P 500 and Nasdaq performed strongly during his tenure. Trump has also claimed that if Kamala Harris wins the election, the market could face a 1929-like crash.
In addition to political risks, investors in Silicon Valley are anxious about a proposed tax on unrealized capital gains, part of Harris’ potential economic plan or an extension of Joe Biden’s policies. The tax plan has sparked concerns within the tech sector.
Given the rising uncertainty and the volatile market, many investors are seeking alternative strategies to diversify their portfolios beyond traditional hedges like options or futures. One area gaining attention is prop trading firms that use their own capital to trade stocks, bonds, or other financial instruments for profit. Prop trading firms often have access to advanced technology, high-frequency trading tools, and data-driven strategies that allow them to capture short-term gains in volatile markets.
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Additionally, retail investors are increasingly using stock analysis apps to monitor market trends and identify potential opportunities within prop trading and other alternative investments. These apps provide real-time data, technical indicators, and stock ratings, helping investors make more informed decisions in an unpredictable market environment.
Diversifying into prop trading or other alternative investments, such as private equity or real estate, can provide an additional layer of protection against stock market swings. Unlike traditional investments, prop trading isn't directly tied to the broad market’s performance, which can be advantageous during periods of heightened volatility and economic uncertainty. Expanding into alternatives can help smooth out portfolio returns and provide exposure to different risk factors, complementing the protection offered by traditional hedging tools like the VIX.
In an environment where political, economic, and market risks are converging, diversifying across different asset classes and strategies, with the help of tools like stock analysis apps, could prove critical for long-term portfolio resilience.
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