Uncertainty was plaguing the markets as we headed into the fall months. Between the pandemic and presidential election, worries over what’s next sent volatility sky-high. Last week, volatility crashed down.
Volatility crashed down – here’s what that means
For several weeks, I’ve been talking about the big premium in volatility that was priced into October and November VIX futures. It was tied uncertainty around the presidential election. With so much lead time, I speculated that betting on volatility was not likely to pay off.
And that’s exactly what happened.
Once again, we saw the inverse relationship between volatility and market variables on full display. Volatility crashed down last week as markets rallied sharply. This move higher came on the heels of one of the worst weeks for the markets since the pandemic hit.
So what does that mean?
Markets have moved past the election and are looking ahead to the final weeks of trading in 2020 and what might be in store for 2021. And they are feeling pretty good about what they see.
The rally also shows that the stock market really does not care about political parties. Argue all you want! The stock market doesn’t lie. Traders and investors are now considering economic data, which, after this past week, is looking rather positive.
But what about the Fed?
I’m glad you brought that up. Fed Chair Jerome Powell reiterated the Federal Reserve’s pledge to accommodate markets for the foreseeable future. (From where I sit, I believe this timeline will be measured in years rather than months.) In response to the Fed statement, gold rallied sharply this week. This has some analysts rather concerned about the inflationary fans of an over-generous Fed providing too much liquidity.
I wouldn’t put much stake in those concerns, as we have heard them over and over for months. So far, it’s not much more than hazy smoke.
It’s time for everyone to move forward. There are plenty of pressing issues to consider as you formulate your trading strategy. The election is no longer one of them.