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Stock Investors' Bets Eye a Biden Victory, Robust Stimulus

10/27/2020 | 04:45am EST

By Gunjan Banerji

Despite the steep stock-market selloff Monday, investors appear to be positioning for a speedy outcome to the presidential contest and dwindling volatility through the end of the year.

U.S. stocks, particularly those in sectors most sensitive to higher economic growth, have ascended in October, while Treasury yields have jumped as bond prices have fallen. Bets on volatility falling through the end of the year in the derivatives market picked up, after months of investors positioning for rocky markets into January.

Value stocks -- shares of companies that typically trade at a low multiple of their book value, or net worth -- have outperformed. The S&P 500 Value index has advanced 1.6% in October, beating the S&P 500 Growth index's 0.8% gain. The value index is on track to beat its counterpart for the second consecutive month, something that hasn't happened all year.

Those market moves suggest investors are taking their cues from polls showing former Vice President Joe Biden with a steady lead over President Trump, which increases the chances of a decisive victory. They also see a robust fiscal stimulus plan in the cards. Although other dynamics are at play in markets, ranging from the Covid-19 caseload to the vigor of the global economic recovery, many investors say increased expectations for an orderly U.S. election season have been among the key developments in recent weeks.

"They no longer think the election is going to be something that takes us a long time to figure out," said Amy Wu Silverman, a managing director at RBC Capital Markets. "People are expecting good news out of the fiscal stimulus as well as the vaccine."

Many investors had been betting on prolonged uncertainty after the election in anticipation of a surge in mail-in voting that would leave the outcome undecided for weeks.

On Monday, as U.S. stocks fell sharply and the Cboe Volatility Index, or VIX, climbed, some investors positioned for its fall through bearish options on the gauge, Trade Alert data show. A bearish bet on the VIX is akin to a bullish bet on the S&P 500 because the two tend to move in opposite directions.

"It's been a very popular trade to position for volatility to go lower after the election," said Christopher Murphy, co-head of derivatives strategy at Susquehanna Financial Group, adding that these bets appeared resilient even during the stock-market selloff on Monday.

The recent jump in the stock market's laggards, including financial shares, comes as analysts have said that a Democratic sweep of the White House and Congress could benefit the economy and markets. Goldman Sachs Group Inc. analysts said earlier this month that a Democratic sweep could be a positive for stocks. UBS Group AG echoed that sentiment Friday, saying a "blue wave or status quo outcome would likely be modestly better for stocks because it would lead to larger fiscal support."

Business leaders have also embraced the prospect of a Biden presidency, despite his push to increase taxes on corporations and wealthy individuals. Their stances highlight the importance of fiscal stimulus and how the coronavirus pandemic's impact on the economy supersedes many other factors. Democratic lawmakers in Congress have been pushing a $2.2 trillion stimulus package to combat the virus, much larger than Republicans' proposal.

Republicans are often thought to be friendlier to the stock market because of their policies on lower taxes, though stocks have tended to go up regardless of which party controls Washington. Mr. Trump's tax cuts, for example, helped boost the stock market early in his presidency. But that calculus has shifted ahead of the coming election, in part because many believe that more fiscal stimulus is needed to help the economic recovery.

In some cases, investors say the idea of a speedy resolution to the election is more comforting than a lead in the polls by a particular candidate. Still, there remain countless unknowns about how the election will affect policy on everything from taxes to climate change and financial regulation.

The recent trading activity also highlights investors' confidence in such polling, despite several political surprises in 2016, such as Mr. Trump's victory and Brexit.

"There's been kind of a revisiting of the sense that the objective read of the polling is the right way," said Josh Younger, a managing director at JPMorgan Chase & Co. "The wider the gap, the more decisive the victory."

Mr. Younger said it has recently gotten cheaper to pick up options around the presidential election.

Other traders caution anxiety surrounding the election hasn't dissipated entirely, and the VIX has remained elevated even as stocks have climbed this month. On Monday, it jumped to the highest level since early September.

Even some investors who had piled into exchange-traded funds that would benefit from a victory for Mr. Biden appear to be hedging their bets. Solar stocks and other alternative energy shares had surged in recent weeks, partly thanks to the expectation that they would benefit from Mr. Biden's $2 trillion package to combat climate change.

But bearish put options outstanding tied to the Invesco Solar ETF recently surged to the highest level of the year, Trade Alert data show, while the fund fell the most in a single day since March. Such contracts allow investors to sell the shares at a given price, later in time and are often used as hedges.

The chance that "there is a more chaotic outcome -- that probability hasn't gone away," said Parag Thatte, a strategist at Deutsche Bank. "The fear of that outcome has gone down."

Write to Gunjan Banerji at Gunjan.Banerji@wsj.com

(END) Dow Jones Newswires

10-27-20 0544ET

Stocks mentioned in the article
ChangeLast1st jan.
DEUTSCHE BANK AG -0.50% 9.554 Delayed Quote.37.99%
DJ INDUSTRIAL -0.21% 29824.6 Delayed Quote.3.86%
EURO / BRITISH POUND (EUR/GBP) 0.81% 0.9065 Delayed Quote.5.86%
INVESCO LTD. 0.61% 16.575 Delayed Quote.-8.45%
JPMORGAN CHASE & CO. 1.13% 121.26 Delayed Quote.-15.44%
NASDAQ 100 -0.17% 12436.18031 Delayed Quote.42.62%
NASDAQ COMP. -0.40% 12330.174713 Delayed Quote.35.96%
S&P 500 -0.11% 3663.49 Delayed Quote.13.36%
THE GOLDMAN SACHS GROUP, INC. 1.48% 236.04 Delayed Quote.0.28%
UBS GROUP AG -1.23% 12.89 Delayed Quote.6.38%
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