Friday's Market Minute: Volatility Warning

The closely-watched CBOE Volatility Index has remained elevated above 20 since the end of February despite the rally to new all-time highs in the S&P 500 just last month. The election, a stock slump, and more delays on a stimulus package are some of the outcomes investors are considering after President Donald Trump tested positive for COVID-19 overnight. Trump’s diagnosis adds another element of uncertainty to a market that’s already been sizing up the potential for chaos after the Nov. 3 vote.

Now, investors are contending with the possibility of Trump’s ill health and how it could affect the U.S. government. Jolts of volatility should remain in place in the near-term as investors position around the possibility that the U.S. president might become incapacitated. This would inject significant uncertainty into the policy and geo-political outlook. This is clearly a risk-off event and markets are acting as such this morning.

While some investors said Trump’s positive test would largely be a non-issue for markets in the longer term, especially if he shows no symptoms, the uncertainty will remain in place. Markets will no doubt take heed of the news of the President’s illness as it may also further decrease the chances of a stimulus package passing through Congress in the immediate future. Since markets are hoping for more stimulus, its absence will be a concern, given the uncertain nature of a recovery. That being said, it may also speed up the need for more stimulus if the President can work through his quarantine and help broker a deal. The Volatility warning has been present for the last seven months and will most likely be at the top end of its recent range in the near-term.

Photo by Uwe Conrad on Unsplash