The Cboe Volatility Index (VIX), a key barometer of market fear, closed at 17.84 on September 10, marking an 8.38 percent surge in a single trading session. This uptick pushed the VIX above its long-term median of 17.6, signaling a palpable increase in investor apprehension. Data from Cboe revealed the previous day’s close at 16.46, with the 52-week range spanning from a low of 13.38 to a high of 35.30. Just a day prior, Reuters had reported the VIX hovering near 15, with broader volatility measures approaching multi-year lows. This occurred with the significant backdrop of the upcoming November 3 U.S. midterm elections just two months away, a period historically associated with heightened market fluctuations.
Navigating Market Currents: The Paradox of Cheap Protection
The current market environment presents a peculiar paradox for financial advisors and their clients: while investor anxiety appears to be on the rise, the cost of protective measures, often measured by volatility indices, remains relatively low. This juxtaposition prompts a critical examination of portfolio positioning and hedging strategies.
Josh Sheluk, portfolio manager and chief investment officer at Verecan Capital Management, emphasized that neither calm nor volatile markets inherently necessitate a strategic overhaul. "Markets can remain calm for a long time and offer a constructive investment environment," Sheluk stated in an email to Wealth Professional. He further elaborated that volatile markets can be equally constructive, provided investors are adequately prepared. "The most important thing is reminding yourself that calm will not last and ensuring that you are prepared, mentally and financially, for volatility to return," Sheluk advised.
The inherent human tendency to seek safety during turbulent times can lead to suboptimal investment decisions. "It feels comfortable to seek safety when things are volatile, but volatility often presents the best opportunity and the most expensive time to seek safety," Sheluk remarked, attributing mistimed hedging strategies to behavioral biases rather than analytical shortcomings. He underscored this point with a widely recognized investing maxim: "As the saying goes, be greedy when others are fearful, and fearful when others are greedy." This adage highlights the potential to capitalize on market dislocations by acting counter-cyclically.
Historical Precedents and Midterm Market Dynamics
Historical data suggests that the period leading up to U.S. midterm elections can be a source of market choppiness. A Cantor Fitzgerald analysis, cited by Reuters, revealed that the S&P 500 has experienced declines of 5 percent or more during the September-to-October stretch in 15 out of the 24 midterm election years since 1930. This historical trend underscores the potential for increased volatility as political uncertainty looms.
Michael Purves, chief executive of Tallbacken Capital Advisors, noted that the VIX curve, as of the reports from Reuters, was not pricing in a significant premium for the midterm elections. This suggests that current market expectations, as reflected in options pricing, do not anticipate a dramatic spike in volatility directly attributable to the electoral outcome. Purves indicated that corporate earnings had been the primary driver of the equity market performance.
However, other market observers have pointed to the potential for underpriced volatility. Olivier d’Assier of SimCorp commented that a string of three consecutive years of losses on short positions may have left investors hesitant to re-engage in hedging strategies. Simultaneously, Julian Emanuel of Evercore ISI wrote in a note, also cited by Reuters, that implied volatility appeared "compellingly cheap" relative to the risks associated with the midterm elections. He specifically highlighted the potential for a House flip, amplified by a Senate flip, to introduce significant uncertainty into the market landscape.
The Mechanics of Volatility and Hedging Costs
James Learmonth, co-chief investment officer and portfolio manager at Harvest ETFs, explained the direct relationship between expected volatility, also known as implied volatility, and the pricing of options. "Expected volatility, also called implied volatility, plays a significant role in determining the price of an option," Learmonth stated in an email to Wealth Professional.
When implied volatility is low, strategies that rely on selling options, such as covered calls, typically generate less income. "Low implied volatility should reduce the cash flow a covered call strategy generates, all else equal," Learmonth explained. This means that in a low-volatility environment, the premium received for selling a call option is diminished, impacting the income generated by such strategies.
Conversely, periods of higher volatility can be advantageous for strategies like covered calls. Learmonth elaborated that an active covered call strategy can increase its writing levels during quiet stretches, up to a predetermined maximum, to compensate for cheaper options. "Higher volatility lets the strategy write against less of its underlying equity position, write at higher strike prices, or both," he said, enabling the strategy to "participate to a greater extent in any potential market rally" while maintaining cash flow stability.
Strategic Portfolio Construction Amidst Uncertainty
The confluence of several factors suggests a heightened potential for market volatility in the near term. "A historically seasonally weak period for markets through September, elevated geopolitical tensions, an uncertain path for US monetary policy and US mid-term elections all threaten to lead to higher levels of market volatility," Learmonth observed.
In response to these prevailing conditions, advisors are considering diversified portfolio constructions that balance growth potential with defensive characteristics. Learmonth described a "barbell" strategy that pairs exposure to growth-oriented and pro-cyclical sectors, such as technology and industrials, with defensive positions in healthcare and utilities. This approach aims to "reduce overall portfolio risk while remaining invested for a time when the clouds of uncertainty part." The rationale behind this strategy is to capture potential upside during favorable market conditions while offering a degree of protection during downturns.
Broader Economic Indicators and Systemic Risk
The broader economic landscape also warrants attention. The Bank of Canada’s Financial Stability Report 2026, released on May 28, indicated that equity and corporate debt valuations appeared increasingly stretched when compared to historical averages. The report warned that such stretched valuations elevate the probability of a sharp market correction in the event of an unforeseen shock.
Senior deputy governor Carolyn Rogers, in her opening statement on the same day, acknowledged that while individual vulnerabilities seemed manageable, a more volatile environment could increase the likelihood of multiple vulnerabilities crystallizing simultaneously. This suggests a systemic risk perspective, where isolated issues could cascade and exacerbate market instability.
The S&P/TSX Composite Index’s performance on September 10, as reported by BNN Bloomberg, reflected some of these underlying market pressures. The index was down 289.79 points at 35,616.77 in late-morning trading, coinciding with oil prices topping US$100 a barrel, a development that can have inflationary implications and impact consumer spending.
The Importance of Investor Psychology and Risk Tolerance
Ultimately, navigating periods of heightened market uncertainty hinges on a clear understanding of individual investor profiles. Sheluk reiterated the importance of self-assessment: "It’s important for investors to have an honest assessment of their time horizon and risk profile. If either does not align with the inherent volatility of markets, then the investor should not be in the markets." This emphasizes the fundamental principle that investment strategies must be tailored to an individual’s capacity and willingness to bear risk.
Diversification, while not a panacea for eliminating volatility entirely, plays a crucial role in mitigating its impact. Sheluk concluded, "Diversification will not eliminate volatility, but it can mitigate volatility in a way that makes desired outcomes achievable." By spreading investments across different asset classes, sectors, and geographies, investors can potentially reduce the overall risk exposure of their portfolios and increase the likelihood of achieving their long-term financial objectives, even in the face of market turbulence. The current market climate, characterized by a low cost of protection juxtaposed with rising investor concern and significant geopolitical and economic uncertainties, demands a disciplined and well-reasoned approach to portfolio management.
