Whether you watched the debate with fascination or frustration (or simply tuned it out altogether), investors at the top of the Wall Street food chain are signaling that the world as we know it is unlikely to end in November. In fact, what I see in the options market tells me that people are already tired of the political cycle.
After the votes are counted, there’s a very good chance the S&P 500 will break records. And it doesn’t really matter to the market who wins and who loses. A presidential election is a binary event. Wall Street is a weighing machine.
The balance of trading on Wall Street always reveals where the market as a whole thinks a binary event is going to go. We can do the calculations and see how likely the market thinks any outcome will be . . . and whether that will be good or bad.
This election year is shaping up different because while investors love to speculate about extreme scenarios, the skin in the game (options contracts around October and November) tells us that the real mood is stoic resignation. The big money is already tuned out.
Where it gets interesting is that once the votes are counted in November, the weight of money in the market gets significantly more bullish. Fair value on the S&P 500 jumps 3 percentage points (to 5555, what is now record territory) and under the right circumstances we can see a breakout move to the upside.
Until then, the weight of money in the market points to a net stall. At best, people who are excited about the future think the S&P 500 might climb a couple of points between now and the election. People who are gloomy think the S&P 500 might drop a couple of points. There’s exactly as much money in the put options that reflect conviction that the market will go down as there is in the calls that reflect upward sentiment. Net result: a rangebound crawl in the next 4-5 months.
This is not a factor of traders who like one candidate or fear another. They cancel each other out. What we’re left with is just enough uncertainty (unease, anxiety, exhaustion, disengagement) to keep the S&P 500 trading 3-4% below where it “should” be if this wasn’t an election year. Again, this is just what the options market is flashing.
Whatever the Fed does is baked into this. Whatever happens in the July and October earnings seasons is baked into this. But after the election, the balance of big bets shifts fast. By mid-November, there’s 4X as much money weighted to upside scenarios than there is on the downside.
And what changed today, now that traders got a chance to digest the debate? The Kramer election anxiety gauge shows that Wall Street remains unimpressed with either candidate’s debate performance, with traders still anticipating a bumpy ride until Election Day and then profound relief once the political cycle is over.
A lot of negativity (put options or “shorting” the S&P 500) evaporated this morning in the wake of Biden’s bizarre debate appearance. Traders who dislike his administration are now convinced that even if he wins, he’ll have a harder time doing it and his mandate will be at least as narrow as it is now . . . any policy will need endless compromise and negotiation, which Wall Street enjoys.