JPMorgan: Fiscal Cliff Slow-Walking Feeds Stock Market Volatility

Washington’s precarious fiscal-cliff stalemate. Photograph by Steven Puetzer

Volatility has returned to U.S. stocks since the presidential election, and it’s partly Washington’s fault as the fiscal-cliff stalemate makes investors more and more skittish, according to JPMorgan Chase & Co.

And even bigger swings may be on the way soon, because derivatives tied to the equity market expire tomorrow.

The Standard & Poor’s 500 Index has slumped more than 5 percent since the Election Day close, ending yesterday’s session at the lowest level since July 25. Ninety percent of that retreat “can be attributed to concerns about the U.S. fiscal cliff,” Marko Kolanovic, global head of derivatives and quantitative strategy at JPMorgan, wrote in a report today.

Most of the slide happened in the first session after the election and during or just after two addresses by President Barack Obama on Nov. 9 and Nov. 14. Those spurred “market concerns about going over the cliff” and coincided with the usually low-volume times around 1 p.m. and 1:30 p.m. New York time, Kolanovic wrote.

The president used his first post-election news conference yesterday to threaten that he’ll let the Bush-era tax cuts expire if the Republican-led House shows “too much stubbornness” and won’t extend the tax cuts only for income up to $200,000 for individuals and $250,000 for couples. Stocks extended declines after he spoke, ending the day down about 0.8 percent from before the press conference.

If Congress doesn’t act by year’s end, $607 billion in automatic spending cuts and tax increases scheduled would cause a recession, according to the nonpartisan Congressional Budget Office.

Concerns about Washington gridlock overlap with tomorrow’s expiration for options contracts tied to underlying stocks, which “could cause high intra-day volatility” as investors and traders buy and sell both derivatives and shares to adjust their positions, Kolanovic said in his analysis.

The November options expiring tomorrow are linked to about $450 billion in S&P 500 stocks and futures, the New York-based strategist wrote. That’s a fraction of the index’s $12.1 trillion market value, yet still enough to make the market gyrate because one gauge of value for the expiring contracts tilts in the direction of bearish options versus bullish ones, according to Kolanovic.

Coincidentally, he estimates, the $850 billion in stock market value wiped out since Americans cast their ballots is roughly equal to what the CBO estimates that allowing the Bush tax rates to expire for top earners over the next 10 years.

As lawmakers prepared for budget talks, the S&P 500 slipped 0.2 percent to 1,352.93 at 11 a.m. after swinging between gains and losses and moving in a 0.65 percentage-point range. That’s less than half the average full-day swing over the past month.


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