Atlantic House
06/11/2020

US Election Watch

Whilst we do not know the final result of the US election yet, what we do know is that any hope of a “blue wave” are now gone. The two Senate races, both in Georgia are likely to go to run off elections as they are too close to call. This means that we are unlikely to know the final balance of power in Washington DC until the end of the year, and possible into January. Meanwhile, Donald Trump has begun to cast doubt over the validity of the electoral process by claiming that electoral fraud is widespread. An accusation which right now, seems to have no basis in facts.

The market’s reaction to the outcome is somewhat confusing given that we are in what many, including myself, have called the “worst case scenario”. That being an election outcome which will likely be decided by the courts rather than election day itself. Currently Joe Biden seems to be on the road to the White House and the Senate will likely remain with the Republicans even with a reduced majority. For markets this means that the more radical policy measures of either side of the aisle are likely to be reined in, and a more bipartisan approach will be needed to get business done in Washington.

Although a split congress may be seen to some as a negative, the market should take this as a positive, and it has. The rally of the last few days has left few sectors untouched. In derivatives markets, we see that the market is now discounting a period of elevated volatility in the immediate term. Volatility markets have repeated what has been a common characteristic of political events as implied volatility rose going into the event, but ultimately fell away at some pace in the immediate aftermath. Today we see the VIX Index (a measure of expected volatility in 1 months’ time) at 28 having begun the week closer to 40.

Implied Volatility during recent elections

Although implied volatility in the short term has fallen, the VIX at 28 is high in a historical context. Relative to longer term volatility the market still prices a risk of a drawn out contested election going on until December or Trump trying to make a major decision before he likely leaves office. As we get more clarity on the size of a potential stimulus package, we expect the market to rally further. Until we know the outcome, we are likely to remain in the hands of monetary policy makers. The risk longer term is that Trump maintains control of direction of the republican party even though he does not occupy the White House and we enter a period where gridlock is based on the animosity of losing rather than the substance of policy. The Atlantic House US Enhanced fund is well positioned to take advantage of this. The fund uses derivatives to optimise performance across a range under our growth framework for the US market.