Volatility Jumps as Fed, Selloffs, Even Hillary's Cough Scare Investors

Volatility Jumps as Fed, Selloffs, Even Hillary's Cough Scare Investors

Friday's selloff in US stocks would be called a correction after a long range-bound period if it happened in a less jittery time. But with bonds and crude oil also dropping, investors seem to be cashing out and getting nervous, leading the VIX, known as the "fear index" to jump. 

Political fight making investors nervous? |
Political fight making investors nervous? | Getty Images

A headline in WSJ MarketWatch Monday morning read, "How Hillary Clinton's Health Scare Threatens the Financial Markets." One in Bloomberg stated, "Clinton Health Another Landmine for Suddenly Vulnerable Markets." It would seem like reporters overreaching on a very, very slow news day except that the argument has some validity. 

That the market might move based on whether Democratic candidate and former Secretary of State Hillary Clinton will recover from her mild pneumonia is a sign not just of the conventional wisdom that a Clinton victory in November is already priced in, but also of how many uncertainties the markets face right now. 

Even the notion of Clinton's inevitable victory is not so certain of late. Her Republican opponent, businessman and reality TV star Donald Trump, has taken the lead in a few recent polls and oddsmakers have increased his likelihood of winning from less than 30% to nearly 40%. The consensus is that Clinton would represent continuity from the current administration. The current administration, whatever its differences with Wall Street, has presided over low interest rates, a more than tripling of the S&P 500 index, and the lowering of the unemployment rate from over 10% to less than 5%. 

My friend Jeffrey Hirsch, editor of Stock Trader's Almanacwas the one who taught me that the market pretty much always rallies after a presidential election and in most election cycles, has been fairly agnostic about which candidate investors prefer. If the oddsmakers and the VIX are any clue, this time the market may actually have a preference. More importantly, the market seems to be reacting more nervously to minor events in the months before Election Day than it usually does. 

Why is the market so jittery? It's not Hillary's health or the election, it's all the other stuff. The market tried repeatedly—and failed repeatedly—to reach 2200 in part because investors never got that combination of signals from earnings, the Fed, crude oil, and the US dollar that tend to create lasting bullish sentiment. 

Instead, crude is down, bonds are down, and stocks just had their biggest drop since June last Friday. Currencies are...meh. And the Fed suddenly seems to be raising the spectre of a rate increase this month itself. Janet Yellen has been silent since her last statement, which seemed to signal cautious optimism but not readiness to raise rates in September. Instead, one Fed official after another has given speeches or statements containing ominous and varied hints. 

That leaves investors without much to base their confidence on and, for some of them, enough variables to justify moving to the sidelines. 

Recent reports from industry monitor Hedge Fund Research Inc. show that hedge funds had their biggest month of withdrawals in July, continuing a trend from earlier in the year. Even though the markets recovered from the drop in January and February, investors have continued to exit the markets, cashing out their profits rather than holding out for that post-election rally.

Will they come back in? For the first time in many years, the answer may depend on who wins. 

Whatever might be causing it, volatility means opportunity for traders who can manage their risk exposure. The problem is, volatility can be scary to trade if you don't limit your risk. In a way, volatility can be both a measure and cause of fear. 

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