What markets are pricing right now
With bonds wobbling and the Fed path hazy, options markets still expect a muted reaction to the midterms. Barclays Plc estimates the S&P 500's implied move for the session immediately after the vote at around 0.8% up or down. Kalshi data currently show a 62% probability of a Democratic sweep, and close to 29% for a split Congress where Republicans keep the Senate and Democrats win the House.
Part of the calm is the appeal of gridlock. A divided government can slow legislation, which often tempers big market swings. Strategists at Wells Fargo say traders, at least for now, view the vote as a "non-event." That could change as the date approaches, and a messy outcome is not off the table.
Barclays' Stefano Pascale, who runs US equity derivatives research, says a split Congress could relieve some pressure on bond yields, which would be supportive for equities. As he put it, "Equity investors have written off whatever concerns there are with the upcoming midterm election."
What pros are flagging into Election Day
At JPMorgan Chase & Co., strategists that include Dubravko Lakos-Bujas argue implied volatility looks too subdued with other risks still hanging over markets, citing interest rates, fuel costs, and disruption from artificial intelligence. They favor positioning that benefits from a higher VIX into the vote, either if volatility follows its typical pre-election pattern or if one of those macro risks escalates.
The VIX term structure shows a small pre-election bump, though it's faint. The premium is "not a huge one," is how Steve Sosnick, who serves as Interactive Brokers' chief strategist, described the premium. And James St. Aubin, CIO at Ocean Park Asset Management, calls today's unusually low expected volatility "intriguing" given tensions in the Middle East and a 10-year Treasury yield near the highest since 2002. "Investors have been surprisingly sanguine about interest rates, so you might want to get in on a cheap hedge for the potential election volatility, but also protect against this rate risk hiding in plain sight," he said in a message.
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The volatility toolkit getting attention
In September, Evercore ISI suggested purchasing an S&P 500 straddle, a position that pays if realized moves exceed what's implied during the election period. Bram Kaplan, who leads Americas equity derivatives strategy at JPMorgan, recommends buying October VIX call spreads that would benefit from "a pre-election vol lift" or a "macro flare-up." Volatility screens "cheap into the event," Kaplan said in a client note.
The menu of instruments has broadened too. In April 2022, Cboe Global Markets Inc. launched Tuesday-expiring S&P 500 options, a timely fit since voting occurs on a Tuesday. And in late 2024, a federal court struck down the Commodity Futures Trading Commission's prohibition on political event contracts, reopening the door to derivatives tied to specific races and broader election outcomes.
What history says, and what's different this time
Since 1950, the S&P 500 has averaged a 5.2% gain in midterm years, according to Truist Advisory Services. Usually stocks drift sideways or slip for much of the year, then start to rally in October. This year looks different, with the S&P 500 already up 13%.
For your money, the setup is simple to think about even if it is hard to time: expectations are calm while rates, energy, AI, and geopolitics still hang overhead. Whether volatility wakes up because of the election or something else, it is the gap between what is priced and what happens that will matter most to portfolios over the next few weeks.
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