On the eve of a "historic week," Wall Street chooses to hedge between chasing gains and cutting losses

The U.S. election voting is imminent, but Wall Street stock traders remain cautious.

This is because a series of polls show that the votes for Trump and Harris are currently very close, and Wall Street is concerned that disputed ballot results could delay the election outcome by weeks or even months.

This means that market volatility may increase. Last night, market risk aversion intensified. The "Trump trade" retreated, U.S. Treasury bonds rose across the board, and the dollar experienced its largest decline in over a month.

Another catalyst for risk aversion is the Federal Reserve's interest rate decision on Thursday, along with Powell's remarks at the press conference. The market expects the Fed to cut rates by 25 basis points.

Ahead of the two storms this week, the VIX volatility index has risen significantly, and the volatility term structure has shown extreme inversion.

Morgan Stanley analyst Chris Larkin stated:

“Typically, the Fed's interest rate announcement dominates the discussions of the week, but its influence may persist. Traders and investors who have been waiting for the election results must prepare for the possibility of delayed results and their potential impacts.”

Once the election results are announced, the market will be highly volatile

J.P. Morgan strategist Dubravko Lakos-Bujas expects that once the results of the U.S. presidential election are announced, the U.S. stock market will climb in the final stages of 2024, especially if the outcome leads to a political deadlock. He stated:

“In any deadlock scenario, we believe that as we eliminate uncertainty, reduce volatility, and unwind hedges, the stock market will reprice, and investors will refocus on the Fed as the economy and corporate earnings remain resilient.”

According to Dan Wantrobski of Janney Montgomery Scott, the U.S. stock market largely remains in a consolidation mode ahead of this historic week. He pointed out that investors should expect “more volatility in future trading sessions.”

“Depending on how things develop, the market is either preparing to set new highs or brace for a larger decline.”

BMO Family Office analyst Carol Schleif stated:

“Investor sentiment may deteriorate in the short term, especially if there is uncertainty regarding the presidential election results or if the announcement of the winner takes longer than expected. The election results will eventually be finalized, and we believe any resulting volatility presents an opportunity.”