Calm Markets Can Be Deceptive

The Cboe Volatility Index, or VIX, closed at 17.84 on September 10, up 8.38 percent in a single session and above the long-term median of 17.6.

Cboe data put the previous close at 16.46 and the 52-week range at 13.38 to 35.30.

According to the report, the gauge sat near 15 and that volatility measures were near 2026 lows, with two months to run until the November 3 US midterm elections.

Market Volatility

Josh Sheluk, portfolio manager and chief investment officer at Verecan Capital Management, said in an email that “calm or volatile markets do not create a need for change. Markets can remain calm for a long time and offer a constructive investment environment.”

Volatile markets can be equally constructive, he added, and 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 also said that “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,” attributing mistimed hedging to behaviour rather than analysis.

He closed the point with an investing maxim: “As the saying goes, be greedy when others are fearful, and fearful when others are greedy.”

Furthermore, Sheluk’s comments highlight the importance of emotional preparedness in investing, as market fluctuations can be unpredictable and may lead to impulsive decisions if not managed properly. A well-thought-out investment strategy can help mitigate the effects of market volatility and ensure that investors remain focused on their long-term goals.

Historical Context

A Cantor Fitzgerald analysis found the S&P 500 has fallen 5 percent or more over the September-to-October stretch in 15 of the 24 midterm years since 1930.

Michael Purves, chief executive of Tallbacken Capital Advisors, told Reuters the VIX curve was not expressing any premium for the midterms, and that earnings alone had been driving the equity market.

Olivier d’Assier of SimCorp said that three years of losses on short positions had left investors reluctant to hedge again, while Evercore ISI’s Julian Emanuel wrote in a note that implied volatility looked compellingly cheap against midterm risk.

The historical context of midterm elections and their impact on the markets suggests that investors should be cautious and prepared for potential fluctuations in the lead-up to the elections. The fact that the VIX curve is not expressing a premium for the midterms may indicate that investors are not fully pricing in the potential risks associated with the elections.

Investment Strategies

James Learmonth, co-chief investment officer and portfolio manager at Harvest ETFs, said expected volatility, also called implied volatility, “plays a significant role in determining the price of an option.”

Low implied volatility should reduce the cash flow a covered call strategy generates, all else equal, he said, and an active covered call strategy can raise write levels during quiet stretches to offset cheaper options.

Learmonth described a barbell that pairs growth and pro-cyclical exposure in technology or industrials with defensive positions in health care and utilities, which in his view can “reduce overall portfolio risk while remaining invested for a time when the clouds of uncertainty part.”

The Bank of Canada said in its Financial Stability Report 2026 that equity and corporate debt valuations appear increasingly stretched compared with historical levels, adding that stretched valuations raise the likelihood of a sharp correction if a shock occurs.

Senior deputy governor Carolyn Rogers said that individual vulnerabilities looked manageable, while a more volatile environment made it likelier that several could crystallize at once.

In addition to the barbell strategy, investors may also consider diversifying their portfolios across different asset classes, such as bonds or commodities, to reduce their exposure to market volatility. This can help mitigate potential losses and ensure that investors remain on track to meet their long-term investment objectives.

Risk Assessment

Sheluk said “it’s important for investors to have an honest assessment of their time horizon and risk profile,” and if either does not align with the inherent volatility of markets, then the investor should not be in the markets.

Diversification will not eliminate volatility, he added, but it can mitigate volatility in a way that makes desired outcomes achievable.

The S&P/TSX Composite Index was down 289.79 points at 35,616.77 in late-morning trading on September 10, as oil topped US$100 a barrel.

Investors should regularly review their risk profile and time horizon to ensure that their investment strategy remains aligned with their goals and risk tolerance. This can involve reassessing their asset allocation, rebalancing their portfolio, and making adjustments as needed to ensure that they remain on track to meet their investment objectives.