Good morning, and happy holidays! Greg McKenna here filling in for Sheryl.
The resolution of the U.S. election has CFOs increasingly confident heading into 2025. In Grant Thornton’s fourth-quarter survey of finance chiefs, 68% of those polled expressed optimism about the state of the economy, a 22-percentage point increase from Q3.
Wall Street is similarly bullish about tax cuts and deregulation boosting corporate profits under the incoming administration. In a recent CNBC survey, 70% of the chief investment officers, equity strategists, portfolio managers, and other investors polled think President-elect Donald Trump “will be great for the economy and markets.” Meanwhile, the VIX, popularly known as the Street’s “fear gauge,” has settled well below its long-term average.
One corner of the derivatives market—known colloquially as “crash protection”—may be telling a more complicated story, however. The CBOE SKEW Index, a cousin of the VIX, is an attempt to quantify “left-tail risk”—statistician-speak for a massive equity sell-off. The index hit an all-time high before markets closed on Christmas Eve.
The more famous CBOE Volatility Index, or VIX, measures the expected price fluctuations, or volatility, in S&P 500 (^GSPC) call and put options that are “at the money,” meaning their strike price is identical to the underlying asset’s current market value. The SKEW, meanwhile, uses strikes that are “out of the money,” or well below market price.
Bill Sterling is GW&K Management’s global strategist and former chief international economist at Merrill Lynch. He told me that buyers are likely protecting themselves against unexpected market downturns in case other parts of Trump’s agenda—particularly regarding tariffs and mass deportations of immigrants—wreak havoc on equities.
To clarify, traders aren’t paying record prices for these doomsday options in absolute terms. Rather, as Nitin Saksena, head of U.S. equity derivatives research at Bank of America, put it to me, investors are “paying a record amount for crash protection relative to protection against the more moderate sell-off.” Technical factors, he added, complicate how much of the SKEW’s rise captures increased demand for hedging strategies.
That said, Sterling notes traders are preparing in case the self-described “Tariff Man” follows through on some of his more extreme proposals for taxing imports. Meanwhile, in Sterling’s view, the big wild card is Trump’s promises to carry out the “largest deportation program in American history.”
More than 8 million people are estimated to be working in the U.S. illegally. The Peterson Institute for International Economics modeled the removal of all those unauthorized workers as a negative supply shock that would lower GDP an estimated 7.4% by 2028.
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“But nobody, I think, on Wall Street, believes anything like that is going to happen at this point,” Sterling said. “The mantra you hear is, ‘Take Trump seriously, but not literally.’”
Greg McKennagreg.mckenna@fortune.com
This story was originally featured on Fortune.com