Lessons From the 2016 Election Market Response

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Market participants use futures and options to manage risk around specific events, and volatility more broadly. In 2016, we saw a significant market reaction to the results of the U.S. presidential election, particularly in equity index markets. The surge in market activity on the election news came against the background of a prolonged period of low volatility in many markets.

In the lead-up to the 2020 election, the volatility environment seems to be quite different. The impact of the global pandemic, U.S. economic downturn and the prospects of low interest rates for the foreseeable future have roiled markets since February. Given these circumstances, the election could present a unique event risk to markets.

The results of the U.S. Presidential election in 2016 were delivered throughout the November 9 overnight trading session, and many market participants utilized E-mini S&P 500 futures contracts to manage their risk after the U.S. cash markets closed. As in 2016, the overnight trading capabilities and breadth of products across six asset classes on CME Group’s markets will be available to those seeking to manage their risks around the clock throughout the election. 

2016 U.S. Election

The results of the 2016 U.S. Presidential elections surprised many and defied most probability models, even as polls had tightened in the weeks leading up to the election on Nov. 8, 2016. Markets in general were caught on the back foot, leading to significant movements across equities and rates as results came in the evening of Nov. 8 and into the early morning hours of Nov. 9.

As markets responded to the news, equity futures saw dramatic moves that were largely reversed by the end of the U.S. trading day. This reflected how market participants were digesting the impact of the electoral news and adjusting their expectations of the new administration.

This dynamic response to the results highlights the flexibility and reliability of futures markets for participants seeking to hedge risk against a changing news cycle. E-mini S&P 500 futures saw record volumes and tight bid/ask spreads throughout the trading day, during both U.S. hours and around the clock. Markets reeled in response to the results of the 2016 presidential elections, with E-mini S&P 500 futures prices falling more than 6% before ending the day higher. Volumes were elevated throughout the day as traders worked to protect their exposure. 

Volatility 2016 v. 2020

The election in 2016 occurred during a very different volatility environment than markets are currently facing. Implied volatility in the E-mini S&P 500 for the months leading up to Nov. 8, 2016 was fairly stable, between 10% – 15%. The same months in 2020 highlight recent changes in overall volatility dynamics, with implied volatility consistently above 20%, and as high as 25%, throughout September and into mid-October. 

Micro Approach

In 2019, CME Group launched a suite of right-sized Micro E-mini futures contracts on four major U.S. equity indexes: the S&P 500, Nasdaq 100, Russell 2000, and Dow Jones Industrial Average, as well as Micro E-mini options on the S&P 500 and Dow Jones indices in Aug. 2020.

In the wake of volatility spikes in early 2020, the Micro E-Mini S&P 500 futures contract has been increasingly utilized to help traders manage uncertainty in the marketplace. Even as volatility stabilized in the second and third quarters of the year, Micro E-mini S&P 500 futures volume has remained elevated. With the launch of options on these contracts, traders can tailor strategies to manage risk ahead of key events. 

Markets reeled in response to the results of the 2016 presidential elections, with E-mini S&P 500 futures prices falling more than 6% before ending the day higher. 

Managing uncertainty has always been a core function of futures and options markets, and that’s never been truer than in 2020. When it comes to election results, however, we can look to history, volatility levels and available tools to understand the ways markets can respond to expected or unexpected results.

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