A bonus with respect to the Cubs pulling off what we all thought was impossible has been a distraction from the political process we have all been enduring. Before bringing everyone back to reality I want to throw an interesting thought out there. If three years ago someone had said the Cubs will win the World Series and less than a week later Donald Trump would be elected President of the United States, you would think they were referring to a subplot in Back to the Future IV.
We know that the election dynamic changed last week, the stock market sold off, and VIX moved to levels not seen in some time. However, there’s more to S&P 500 volatility than the 30-day time frame, and CBOE measures that with VXST, VXV, and VXMT which respectively focus on 9-day, 3-month, and 6-month volatility. Today I want to talk about what’s been going on with the longer dated indexes. But first a chart.
The chart above shows the levels for all four SPX related volatility indexes from last Friday (when the tide started to turn for the election) and on the close yesterday. 9-day volatility has gone through the roof and VIX has had a strong move as well. But look at the rise in 3-month and 6-month volatility which I subtlety highlight above. VXV has moved from around 17 to over 20 and VXMT moved from 18 to above 20 as well. There’s just one way to read this – risk premiums are rising beyond the election as well. It will be interesting next week to see the election outcome, but to also see if the market continues to price risk at a premium going into 2017.