Investors are becoming increasingly concerned as the presidential election approaches. UBS Head of Equity Derivatives Research Stuart Kaiser joins the On the Move panel to discuss.
- This is having an impact on investments and on markets. And to take a look at the outlook, as well as the concerns of the election, we invite into the stream a friend of the program, Stuart Kaiser, UBS's head of Equity Derivatives Research. He is in New York, joining us now.
Stuart, we would normally go right to markets. But I have to ask you, this kind of back and forth, the volatility of the rhetoric from President Trump, from the Democrats, it's having what kind of impact on the markets? Is it making them queasy?
STUART KAISER: I think it does make them a bit queasy, but the markets are-- and good morning. Sorry, Adam and Joy. Nice to have you on here again.
The markets are obviously very much aware of this and have priced a tremendous amount of risk into the options markets on election day. And then frankly, for the six to eight weeks after election day, at this point. So I don't know that it is responsible for day-to-day movements in the S&P 500.
But in terms of how people are preparing for it, there's a tremendous amount of risk priced in. And the way we saw that evolve was initially, a lot of risk priced in on election day. And then over the last four to six weeks, that risk has been slowly pushed out until later November, and then into earlier December.
So the market seems to be pretty on top of this, in terms of the narrative. Whether it actually plays out, obviously is another question to ask. If you look back to 2000, which of course, everyone is doing, to get a precedent for a contested election, the equity market itself, the S&P had about a 10% or 12% draw down over about a month long period.
But volatility didn't respond nearly as much. So I think the market is trying to decide whether this is a cash equity trade or something that you should do much more on the opposite side.
- And Start, it seems as well-- just looking at the situation now, it seems like it could be potentially more extreme than what we saw in 2000 also. Are there any other places that you're seeing, besides sort of the VIX curve, this election uncertainty play out? Or are there any other ways that people seem to be sort of bracing for that eventuality?
STUART KAISER: Yes, look, the VIX curve clearly, listed S&P options, as well. And then, I think at the single stock and sector level, people are really struggling with how to reflect election risk. The most obvious one would be to a trade taxes. So to identify companies most impacted if corporate taxes would arise under a blue wave type scenario.
And then that also brings tech into the discussion. And a lot of people are really trying to handicap what would happen to tech in that case, because tech has been the market leader. But if there were broad-based regulatory actions taken against the sector, or if you increase corporate taxes, or increase capital gains taxes, which might have smaller investors selling stocks to lock in a lower tax rate, all of those could be headwinds for the tech sector.
The hard part is, it's the sector that's generally working. So do you want to bet against it in the approach to the election, or is this something you want to do as the election really nears?
So I think those would be the two areas-- corporate taxes and then the tech sector, where the most debate has been had. And health care and financials I think would be your tier two ways to approach that.
- Hi, Stuart. This is Emily. Just looking at the election, if you're a short-term investor, I can see how markets perhaps can't see past the next 40 days or so. But if you're a longer term investor, how do you really see them playing this election risk? When might those uncertainties start to dissipate? And when could that positioning start to come back into play?
STUART KAISER: Look, I think for a long-term investor, ideally if there is any pullback, you'd look at that as a buying opportunity. I think the question would be, if you're thinking about the blue wave type scenario, which I don't think most investors consider the majority outcome but probably the plurality outcome. So the most likely of the three.
If that were to happen and you were to get a significant change in the regulatory and tax environments over the medium term, then clearly you have to kind of bake that into your outlook for markets. So I think, big picture, if there's a stock you really like and the election gives you an opportunity to buy that at a better level, that probably makes sense.
But if you do get a blue wave with real structural changes to the corporate and regulatory environment, then maybe you need to ask some questions about what that means for longer term earnings power. But I would tend to agree with you, if you're someone who's going to hold the stock for five years, the election may give you a better entry point rather than a risk.
- Hey, Stuart, it's Brian Cheung here. So Emily asked you to look forward. I guess my question is kind of looking backwards. What does a derivative space look like in terms of volume now versus say, at the onset of this virus in late March, early April? It does seem like, for right now, if you look at broad asset classes, it seems like things have kind of gone back to normal, if you will, with investors maybe ignoring some of the economic data that we see on that front.
But is derivative pressure maybe to blame for some of these 500, 600 point selloffs that we've had kind of periodically over the past few weeks? Or is that just normal market functioning?
STUART KAISER: You know, it's a great question. There's been a lot of new coverage obviously, of the large options activity, particularly in the tech space, that went on in late August and early September. And clearly, that did have an impact on how markets were trading.
Our view would be that positioning doesn't drive the market to sell off or to rally. But it creates a situation in which the market can move more or less in response to news. And I think that's what happened in late August.
Basically, what happened is a lot of investors were buying call options and upside in the tech space. And that left Wall Street short a lot of those options. And I think that did contribute to the very sharp rally you saw in late August. And then unfortunately, it also kind of contributed to the unwanted bit.
Our view is that a lot of that risk has been digested over the course of the last couple of weeks. More than 50% of those options expire last week in September. So the size of it has decreased a little bit. And we do believe that the last couple of weeks, when market calmed down even just a little bit, allowed Wall Street to adjust a little bit better in those positions.
So it's definitely had an impact. It's just sort of curious that the impact was at a very bullish trade, actually turned off, turn turned into creating a risk of a sell off. So I would say definitely, derivative space is in play here. If you take a step back, US equity markets, their implied volatility is very, very high relative to other parts of the world, and also relative to how much realized volume they've been generating.
But I think you could argue that makes sense. We have a lot of-- we've got a lot of headlines ahead of us. And a lot of people are worried about the election, the vaccine, the Fed, earnings. There's a lot of reasons for that risk to be priced into the system. But clearly, it has at least been one contributor, in terms of the volatility we've seen for the last couple weeks.
- Stuart Kaiser is UBS's head of Equity Derivatives. Good to see you, Stuart. And we look forward to the next time you join us.
STUART KAISER: Thanks very much. Have a good day, everybody.