Goldman Sachs Group (NYSE: GS) warns that traders anticipating the upcoming presidential election may overlook a significant risk: the possibility of no definitive result on election night.
Given the tight race between President Joe Biden and former President Donald Trump, it’s plausible that Americans won’t know the winner on November 5 or even in the following days.
According to David Kostin, the bank’s chief US equity strategist, this uncertainty could trigger a surge in stock market volatility that investors have yet to price in.
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Stock market volatility and recounts
Speaking at the Goldman Sachs RIA Professional Investor Forum in New York, Kostin expressed concerns about potential recounts, suggesting they are likely given the close race.
Goldman strategists, led by Kostin, highlighted in a note to clients that many investors deem it premature to position themselves for election outcomes.
However, they emphasized that a tight election presents unique risks that current volatility markets, as indicated by the VIX futures curve, fail to account for.
Strategies for managing risk
S&P 500 Index options show minimal signs of significant positioning related to the election. The implied volatility for at-the-money contracts expiring on November 15 is less than a percentage point higher than mid-October options, remaining relatively stable over the past month.
Despite the VIX futures curve indicating a premium for October contracts, reflecting S&P options post-election, this premium has remained steady since the contract began trading.
Goldman Sachs advises clients anticipating an undecided election for more than 15 days to consider owning November VIX contracts.
These contracts, which represent implied volatility through mid-December, trade below October contracts, offering a strategic approach to managing potential market volatility stemming from election uncertainty.
