Investors seek hedges as midterms and geopolitical risks threaten market calm

Investors are starting to seek more protection against stock market swings as a historically volatile period for markets approaches.

One sign of that nervousness is emerging in Cboe’s VIX volatility index. The VIX, often referred to as Wall Street’s “fear gauge,” measures the level of volatility investors expect in the S&P 500 over the next 30 days, based on options prices. It tends to rise when investors become more anxious about the outlook and rush to protect their portfolios against sharp market moves, and fall when markets are calmer. A higher VIX therefore generally signals greater uncertainty or fear among investors.

September and October are typically among the months when the VIX jumps the most, after midyear drops.

This seasonal proclivity, compounded by the upcoming U.S. midterm elections, interest-rate risk from oversupply dynamics, hawkish central bank impulses and an escalation in Middle East hostilities in recent days, may be bringing investors to seek protection from what Nomura’s Charlie McElligott referred to as a “negative risk trinity.”

Equity investors “now have something to hedge against” after bringing cash back into the market, McElligott said in a note Wednesday.

Investors are also paying unusually high prices for options that protect against a jump in stock-market volatility over the next three months, he said. One measure of those options prices — the VIX three-month call skew — is in the 91st percentile of its historical range, meaning they have been more expensive only about 9% of the time.

“As we move toward year‑end, we anticipate higher equity‑market volatility—both upside and downside—as rate expectations shift and cross‑asset pressures build,” said Luke Rahbari, CEO of Equity Armor Investments.

Rahbari said there are already signs that stress in the Treasury market is spilling into stocks.

The MOVE Index, which tracks expected volatility in the Treasury market, remains elevated as bond investors weigh shifting expectations for interest rates, inflation and the supply of U.S. government bonds, Rahbari noted.

But some measures suggest markets are not yet under unusual stress. Both the MOVE Index and VIX are near their 10-year averages, while corporate credit spreads — the extra yield investors demand to hold corporate bonds instead of government debt — remain historically tight, said Zachary Griffiths, head of IG and macro strategy at CreditSights.

Griffiths said volatility could increase as markets emerge from the typically quieter summer period. But market swings could ease later in the year.

Volatility tends to decline in November, said James Ooi, market strategist at Tiger Brokers. He said the VIX falls about 4% on average as midterm election results remove some political uncertainty and give investors more clarity about the policy outlook.