Peter Repetto, investment strategist at iCapital, spoke with Quartz for the latest installment of our “Smart Investing” video series.
Watch the interview above and check out the transcript below. The transcript of this conversation has been lightly edited for length and clarity.
ANDY MILLS (AM): The newest poll showed Trump and Harris neck and neck, which could lead to a contested election. What do you foresee happening in the market if that’s the case?
PETE REPETTO (PR): We think volatility probably should increase going into the presidential election. If you look at historically how the VIX index has moved into the lead up of presidential elections, typically we see about a 10-point rise from the beginning of August to basically the end of October and then you start to taper off a little bit into the election just as you had that that move higher in volatility. So it wouldn’t be that surprising to us if you did see a spike in volatility here. We did see a spike in early August, but you know, if subsequently traded a little bit lower, I would also say is if you go back to the 2020 election, we saw an 11-point rise in the VIX index in the last two weeks of October in the lead up to the 2020 election. So in thinking about that, that took a few days to figure out the ultimate outcome of that election. If this election night does turn into election days, then it would not be surprising for volatility to be a little bit elevated through that episode.
AM: The VIX index is strongly correlated with the market going down sharply. Is that what we’re not saying here?
PR: It could, and we did talk about this in our latest iCapital market pulse piece where we could get a bumpy October and that would be a potential risk. You know, it does feel like the markets, at least on a Harris basis, are very focused on potential tax increases and then from a Trump perspective, potential tariff increases. Those could not only weigh on earnings expectations for next year, but also could weigh on economic growth. So we do think market participants are focused on this, just given the fact that economic data has been strong and resilient, what are the risks in that case? So whereas yes, that could correlate to some consolidation in markets in the lead up to the election. What’s interesting to us is irrespective of which party holds the White House, you actually typically see pretty good gains in S&P 500 the year following the election with the median return basically being around 16%. So even though we could see volatility in the near term, we do think that investors should either weather the storm or add to allocations that they de-risked heading into the election.
AM: We talked about the fear index and it typically goes up leading into an election. Do you see that continuing beyond the election for any particular set of risks or reasons?
PR: It could, but I think once we do get past the election and just as you know, we’ve seen this historically throughout different presidential cycles, it does start to move lower once we get past the election. And while there are risks to certain policy proposals by both candidates, I think the markets will have more certainty in what that looks like for the next four years. So they can start to more accurately reflect, alright, well what are economic growth projections gonna look like? What are earnings expectations gonna look like? So once we start to get that outcome more, once the outcome becomes apparent, markets can start to more accurately reflect that. So we’d probably expect the volatility to start to decline or start to return to maybe more of the average that we’ve seen so far this year.
