With the U.S. election voting approaching, the market is experiencing huge fluctuations! Traders are all "watching from the sidelines."

According to the Zhitong Finance APP, there is one trading day left before American voters will elect their next president, which could determine the direction of the U.S. economy for the next four years.

Traders are discussing various possibilities, constantly checking the latest polls and election betting market trends to predict whether Republican Trump or Democrat Harris is leading, and what this means for their asset allocation. In some markets, there is speculation that Wall Street is betting on Trump. However, when it comes to actually putting money into the stock market based on this, the situation is unusually calm.

Investment professionals know that successfully predicting the winner before they emerge can lead to unexpected wealth. The problem is that this election is highly competitive, making it difficult for many to bear the risk of making incorrect predictions.

Eric Diton, President and Managing Director of Wealth Alliance, stated in an interview: “We do not position ourselves ahead of the election results because it’s like flipping a coin. Betting is meaningless.”

Most traders believe there will be volatility this week, and it could be significant, as a controversial outcome is likely to delay the voting results by weeks or even months. This explains why the Chicago Board Options Exchange Volatility Index (VIX) has risen above 20 in the past four trading days, a level that typically signals increased pressure in the stock market. This is also why investors are less eager to pick winners and losers based on who they think will be the next president of the United States.

Dave Lutz, a stock sales trader and macro strategist at JonesTrading, said: “Past polls have been wildly inaccurate. It’s impossible to tell who will win.”

Holding Cash

Another positioning challenge is the number of additional catalysts that could influence market movements surrounding the vote. On the Thursday following election day, the Federal Reserve will announce its interest rate decision, and Fed Chairman Powell will hold a press conference to detail the Fed's interest rate path. Additionally, a large number of U.S. companies will continue to report earnings, with chip giant Nvidia (NVDA.US) expected to announce its earnings on November 20, Eastern Time.

This explains why Lutz has not specifically positioned for the election. Instead, he suggests “holding some cash” to be ready to allocate when any short-term opportunities arise, such as when a winner emerges and individual stocks or sectors may react.

“I would say that many investors’ positions are just like this,” Lutz said.

For example, Robert Schein, Chief Investment Officer of Blanke Schein Wealth Management, stated that he has increased his cash equivalents from the usual 5% to 10% ahead of the election. His strategy is to be ready to buy assets aggressively when the results inevitably trigger volatility in at least part of the market Anwiti Bahuguna, Chief Investment Officer of Global Asset Allocation at Northern Trust Asset Management, stated in an interview: "Investors need to consider the persistent election risk. Due to excessive speculation, traders are currently unable to build positions, and they do not know which policy proposals from the two candidates will pass in Congress."

Perhaps unsurprisingly, the market appears tense. The S&P 500 index is close to its all-time high, while the VIX index has surpassed 20. The last time the S&P reached a new high under such a high level of what is known as the "fear index" was during the outbreak of the COVID-19 pandemic in March 2021. Meanwhile, hedge funds are betting on a wider range of price fluctuations. Data released earlier this month by the U.S. Commodity Futures Trading Commission (CFTC) showed that large speculators have net long positions in VIX futures for the first time since January 2019.

Rocky Fishman, founder of Asym 500, stated that options market data shows traders remain defensive, using valuations above normal levels to guard against rapid sell-offs. He added that this is partly driven by a series of reports and data in the coming days, including the Federal Reserve's interest rate decision, corporate earnings reports, and inflation data.

Fishman said: "While the market clearly expects Wednesday to be a day of high volatility when we will learn the election results, this period is by no means calm."

Ignoring Election Noise

Corporate insiders are also reluctant to engage in the stock market. Data compiled by Washington Service shows that only 261 corporate executives bought shares of their own companies in October, the lowest level since at least 2017, pushing the buy-sell ratio to its second-lowest level since spring 2021.

Some Wall Street professionals suggest that investors seeking safer stock investments should ignore the election noise.

Bahuguna of Northern Trust stated: "Elections are events with a low probability, so we fully expect a turbulent period next month. But ultimately, what supports the stock market are decent corporate earnings, strong economic growth, declining inflation, and interest rate cuts by the Federal Reserve."

Northern Trust has increased its holdings in U.S. stocks based on a resilient U.S. economy while reducing bonds to hedge against inflation risks. The company has also increased its allocation to physical assets, including infrastructure, natural resources, and real estate, to protect its portfolio from future turmoil amid a still-tight labor market and strong economic growth.

Others are focusing on corporate earnings, particularly the improvement in balance sheet quality, as the Federal Reserve has just begun to cut rates while interest rates remain high Brian Mulberry, the client portfolio manager at Zacks Investment Management, stated: "Interest rates remain restrictive, and the likelihood of increased volatility before the end of the year is greater, so a more conservative approach is appropriate."

The key to all of this is that in an election with no clear winner, the safest course of action for investors is to patiently wait. This is what Wall Street advocates—at least for now.

Mark Luschini, chief investment strategist at Janney Montgomery Scott, said: "If this were a clearer judgment, it would already be priced into the market, leaving little to take advantage of. But in such a tense situation, it's better to look ahead and continue to think about the macroeconomic conditions 6 to 18 months down the line, rather than just focusing on the outcome of that day."