Cool Hand Luke

The US midterms are fast approaching, and control of the House and Senate could entail very different paths for borrowing, corporate profits, and bond markets. Earnings season is also about to kick off, with valuations facing heavy scrutiny against expectations of almost 30% year-on-year growth in profits. So why are those selling insurance against stock market turbulence charging the lowest premiums since January, before the war in Iran and $100 oil?

Perhaps the distinction is between problems and surprises. It may seem hard to believe, but with oil futures elevated well into next year, persistently high energy costs already appear to be reflected in market valuations. Likewise, an election can change the balance of power without immediately changing corporate profits, and neither outcome is necessarily bad for investors. There is therefore little reason to treat the vote itself as bad news.

In the meantime, earnings give investors something more tangible to focus on, and let’s face it, these have been strong. Guidance going into this reporting season has also been encouraging. Companies facing material disappointments often warn ahead of their results, so there is good reason to expect another healthy set of profits. Perhaps just what the doctor ordered.

For the professionals pricing this insurance, getting their sums wrong can be a hugely expensive endeavour and, in extreme cases, could result in a total loss of capital. Their willingness to offer protection so cheaply therefore suggests they see less reason for alarm than the headlines might have us believe. If rising insurance premiums give us cause for concern, surely falling ones should give us a bit of reassurance.