Investors Seek Portfolio Hedging as U.S. Stock Rally Faces Growing Risks - Multibagger
As the U.S. stock market rally faces increasing risks, investors are turning to portfolio hedging, according to options markets. Uncertainty surrounding the U.S. economy, Federal Reserve policy shifts, and the upcoming presidential election have led investors to seek protection against stock swings.
The Cboe Volatility Index, which measures demand for protection against stock swings, is currently around 20, compared to an average of 14.8 in 2024. Historically, the VIX tends to rise by about 25% between July and November in election years as investors analyze candidates' policy proposals.
This year, political concerns have combined with other catalysts for volatility, such as worries about a potential economic slowdown in the U.S. and uncertainty over the Fed's interest rate cuts. The stock market saw its worst weekly percentage loss since March 2023 last week, but is still up nearly 15% for the year.
With volatility already high, the "election bump" in October VIX futures is smaller than in previous years. Analysts advise investors to stay hedged for the next three to six months, citing potential volatility from economic surprises and geopolitical factors like the U.S. elections and conflicts in the Middle East and Ukraine.
Despite some investors being less nervous about election risks this time around, the upcoming debate between Democrat Kamala Harris and Republican Donald Trump has the potential to impact markets. Analysts expect the debate to generate volatility in the markets.