Investors Hold Tight. More Uncertainty is in the Forecast

Investors are wondering how to protect their portfolios in the run-up to the U.S. presidential election. Since the stock market's peak in early September, traditional safe havens Treasury bonds, gold and options have not sufficiently helped investors hedge their losses. Experts say to expect more downside risk and warn not to buy during market weakness.

In recent weeks, the market has demonstrated just how vulnerable it is to the news of the week, day and hour. When it was announced President Trump and the First Lady tested positive for Covid-19 on October 2nd, U.S. stock futures plunged. When the President called off stimulus negotiations until after the election, the Dow Jones Industrial Average fell by more than 300 points, just minutes after the announcement.

Uncertainties were already in abundance with the meek economic outlook and the Covid-19 pandemic, and now we have the presidential election on November 3rd.

Add to this, traditional safe assets have not served investors well with Treasuries barely moving and gold prices falling. They can normally be relied upon to provide steady income (in the case of bonds) and move in the opposite direction of stocks. But portfolio stabilization can no longer come from Treasuries, given that the Federal Reserve has vowed to keep the real yield near zero through 2023.

Traditional hedges in the options market have also not been performing as expected. Investors were buying S&P 500 puts to hedge the possibility of lower stock prices in November and December, which coincides with the election. However, November and December VIX futures have barely risen. The muted futures performance indicates that options values are not being supported by rising implied volatility.

So, what can investors do? In case of what not to do, experts warn bullish investors to not eagerly buy into the market’s weakness since the usual hedges may not be able to prop up portfolios. And we have said it before and say again, investors should be as diversified as possible to prepare for any storms. For some investors emerging market bonds may be worth a consideration, for instance.

There is no shortage of risks. There are lots of little reasons to be cautious and when they are added together, it signals more downside risk to markets. Hold tight.

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