October proved to be a quieter month, with markets experiencing generally weaker performance as the US election approached. It’s common to see a decrease in momentum ahead of a major binary event, as traders take profits on their winners and reassess their positions, balancing the risks of various election outcome scenarios.
As the election approached, Harris and Trump were neck and neck in the opinion polls; while despite tightening near to election day, betting odds continued to lean towards Trump at around 60/40%. As we now know, that apparently close race turned into a resounding win for the Republicans.
By way of contrast, here in Australia, the first Tuesday in November marks the Melbourne Cup. In this year’s running, the favourites disappeared, and Knight’s Choice confounded the odds. In fact, since the inaugural Cup in 1861, the favourite has won only 34 out of 153 races, which is approximately 22% of the time.
In the context of the two-horse race of US presidential elections, the betting favourite has lost around 25% of the time over the last 35 elections.1
The point is that favourites can lose frequently, and despite what the media or pundits proclaim, no outcome is ever certain. This is also true in investment markets, where a sensibly diversified portfolio usually trumps individual bets on securities.
Major US equity indices were mixed during October, with the S&P 500 returning 1% while the technology-heavy Nasdaq declined by 0.5%. In Australia, the ASX 200 fell by 1.3%. Within US sectors, financials were the best performers, up 2.9%, while healthcare stocks dropped by 4.4%. In Australia, financial stocks rose by 3.2%, whereas consumer staples fell by 6.9% following Woolworths' disappointing results at the end of the month.
Meanwhile, in government bonds, fears of persistent inflation and budget deficits pushed yields higher. The US 10-year yield increased by 0.5%, slightly lower than the Australian 10-year bonds, which rose by 0.53% over the month.
The most significant movements occurred in the implied volatility of major US asset classes, particularly in US bonds as indicated by the MOVE index, where levels surged higher as investors priced in a more uncertain future. The VIX index, which measures implied volatility on the S&P 500, also spiked but remains below the levels reached in the years immediately preceding COVID-19. The USD rallied by 3.2% in what appears to be a flight to safety in response to growing geopolitical risks. Consequently, the AUD experienced a selloff of 4.9% in October.
Given the current market dynamics and the expectation of higher future volatility, there are likely additional opportunities to acquire assets at lower prices. However, until we gain more clarity on the future US landscape, we remain focused on protecting our clients' wealth.
Figure 1. Major US asset class historical implied volatility
