Bloomberg Businessweek - USA (2020-10-12)

25

PHOTO

ILLUSTRATION

BY

PUMPKIN:

GAR

THEBOTTOMLINE If marketsseemstrangelycalmin thefaceof

earth-shakingevents,it mightmeanthenewswasalready“baked

in.”Orit couldjustmeanthemarketis focusedonsomethingelse.

10/2010 9/2020

$ 160

110

60

DATA: COMPILED BY BLOOMBERG

What’sExpectedIsn’tAlwaysCorrect

Usually,S&P 500 earningsarein theballparkofanalysts’forecasts.

Theyhavefallenshortoftheconsensusthisyear.

AggregateS&P 500 earningspershareforthepast 12 months

What analysts estimated a year in advance

1/2020

e Islandconstructioncompany’s401(k)plan,

eserveBankofIndia’smonetary policy, and

rnings forecasts of United Internet AG.

aked in” is just traders’ lingo for “expected.”

stock market collectively expects former

PresidentJoeBidentowintheelection,then

s ofstockshavealreadyadjustedtoreflect

xpectation.You,theclueless latecomer, can’t

any money by betting on a Biden victory,

se others have beaten you to it. Markets are,

ord, efficient. In baking terms, the hypotheti-

den victory isn’t a new ingredient. It’s already

rewiththeeggsandflourandbakingpowder

thatbakingsoda?).

ricedin”and“discounted”aresynonymsthat

ppearliberallyinfinancialnewsstoriesand

Streetanalysis.Theideabehindallofthem

t tomakemoney,it’snotenoughtoknow

willhappen.Youalsohavetoknowwhether

investorsalreadyexpectit.Makingthings

complicatedis thatthemarketmaybestir-

n competingscenarios—atthesametimetrad-

emtoexpecta Bidenwin,therearealsosigns

rehedgingagainsta contestedelection.

s aninvestor,themostimportantthingatany

entintimeis nottheissues,it’showmuchthe

nsushasdiscountedthoseissues,”saysJames

en,chiefinvestmentstrategistforLeuthold

enCapitalManagementLLCinMinneapolis.“I

a gooddealofmytimelookingintowhether

’s under-oroverreactiontoissues.”Today’s

nterestratesarefarmoreimportantforthe

cialmarketsthanTrump’sintenselypublicized

talizationforCovid-19,Paulsensays.

mStovall,chiefinvestmentstrategistatCFRA

rch,says“asharpsecondroundoftheCovid

andtheadverseeffectsthatit mighthave”

t bakedintothestockmarketrightnow.If

is a secondwave,hepredicts,stockswould

ablyselloff.AndjudgingfromWallStreet’s

tivereaction,Trump’sapparentsuspension

ronavirus-reliefnegotiationsonOct.6 wasn’t

intoprices,either.(Stocksclimbedbackthe

dayaftersubsequentTrumptweetsmuddied

aters.)

wcananyonebesurewhatthevastglobal

ork of investors is actually considering

whenarrivingata priceforstocks?Thetruthis

thatdetectingtheconventional wisdom, i.e.,

what’sbakedintostockprices,“isasmuchanart

formasit isa science,despitewhatmanysay,”

saysQuincyKrosby,chief marketstrategistat

PrudentialFinancialInc.Whatmakesthetaskeven

harder,sheadds,is thatthemarketcanchangeits

collective mind in a hurry. The initial reaction of

themarketstoDonaldTrump’ssurprisevictoryin

the 2016 election was negative, but within hours,

she says, “the market had a change in attitude and

hasn’t looked back since.” �Peter Coy

ThenewsthatPresidentTrumpcontractedCovid-19,

followed a few days later by his confusing series of

tweets about stimulus negotiations, left investors

wondering what could possibly happen next. But

many traders had already set up defensive hedges

against sudden bouts of volatility, using options and

futures. They’d prepped not only for an October sur-

prise, but a November one, too.

“The Covid-19 election is a unicorn,” says Michael

Arone, chief investment strategist for the U.S. SPDR

exchange-traded fund business at State Street Global

Advisors. “The range of outcomes has gotten a lot

wider.” One possibility markets are worried about:

Trump refusing to accept a loss. That anxiety is most

observableinVIXfutures,a waytobetonvolatil-

ity.Theytendtoserveasa sortofinsurancepol-

icyagainstlossesintheS&P500.Hedgingactivity

against outsize swingsneartheelectionhasbeenvis-

ible all year in thesecontracts. Normally, prices of

● Hedges against volatility have grown,

particularly for the period just after Election Day

Traders Are Still

Braced for Chaos

NCE Bloomberg Businessweek October 12, 2020