The S&P 500 could ‘easily’ dip into a correction before the election on Tuesday
Our mission to help you navigate the new normal is fueled by subscribers. To enjoy unlimited access to our journalism, subscribe today.
Buckle up, investors: it might be a rough few days.
The S&P 500 “could easily dip into correction territory on Monday, it wouldn’t be surprising if that happened,” says Randy Frederick, Charles Schwab’s vice president of trading and derivatives. The S&P 500 would need to touch 3,222 points to register a 10% correction from its previous high on Sept. 2. On Friday, the index closed down 1.2% at 3,269.96, about 1.4% above correction territory.
To be sure, it’s been a rocky week in the markets heading into Election Day on Nov. 3: With the Dow down 6.5% for the week (and S&P 500 down 5.6%), markets just booked their worst one-week drop since the throes of the pandemic back in March.
Up until recent weeks, markets had felt more comfortable that there wouldn’t be a contested election, Schwab’s Frederick suggests, but now, it looks as if some investors believe the race is tighter. With conflicting views in the markets, Frederick says he’s seeing a mixed bag of signals, and there could be moves up or down.
“The indicators I follow are just all over the map, I can’t remember the last time there was such huge disagreement,” he tells Fortune. “I’ve got some indicators showing me very strong bullish signs, I’ve got some showing me very strong bearish signs, and some that are showing things they typically don’t show unless there’s high volatility expected. When you get a mix like that, about all you can say is that we know there’s going to be movement, we just don’t know which direction.”
The one thing investors can count on in the next few days? “Things are not going to be calm and lazy and quiet,” suggests Frederick.
Strategists like Frederick are watching options and the VIX, or fear gauge, noting that the open interest put/call ratio for the VIX was at its highest level since March on Friday. However, he notes index options (which typically show more institutional activity) might be signaling some hedging for the downside going on.
To be sure, with the election a mere two trading days away, investors are antsy, and some market observers are trying to read the tea leaves: Only twice have markets shed more than 3% in a day within six days of an election (as the S&P 500 and Dow both did on Thursday), and both times the incumbent lost, LPL’s Ryan Detrick pointed out Thursday.
Markets overall have become increasingly anxious in the past week or two as talks of a stimulus deal before the election fizzled out, and more concerning still, cases of the coronavirus in the U.S. and worldwide continue to rise, sparking fears of further restrictions (some countries have already begun another round of lockdowns).
Indeed, absent last-minute jitters over the election, the uptick in the virus cases this week has been “the biggest catalyst for the downside moves,” says Frederick.
Still, strategists like LPL’s Jeff Buchbinder argue we’ll see a rally after election once a clear winner is named—”Whether it’s Biden or Trump, we think that clarity will help,” he tells Fortune.