Reducing Post-RBG Risk

Summary

• In case the raised political risk in the wake of the Justice's passing translates to market risk.

One of the tributes to the late Supreme Court Justice Ruth Bader Ginsburg left outside the Supreme Court (photo via Samuel Corum/Getty Images).

The Passing Of RBG Raises The Temperature

American political tensions were at a low boil earlier this month, when former Trump administration official Michael Anton warned of a coup. Reactions over the weekend to the passing of Ruth Bader Ginsberg suggest her death has raised heat. Below we'll look at ways we can limit our risk as investors, but first, here's a quick sampling of some of the heated reactions. 

Heated Reactions

RBG mourners in Manhattan fought with police who attempted to arrest them for blocking the street. 

Former CNN host Reza Aslan was one of a number of Twitter celebrities threatening violence in the event Republicans replaced RBG. 

U.S. Senator Richard Blumenthal of Connecticut issued a vaguer threat; First Trust Avisors' Deputy Chief Economist, Robert Stein wondered if the threat included a coup:

Finally, liberal actor and activist Rob Reiner, after lamenting the loss of RBG, argued the November election was a matter of life and death. 

The Political Risk

A financial journalist asked me over the weekend what I thought the market reactions would be to a Trump or a Biden victory in November. That reminded me of concerns of left-leaning investors four years ago that Trump would be a disaster. As I wrote at the time, Corporate America would easily adapt to Trump's economic policies.

Similarly, today, the more salient question with respect to risk is whether we will know who won on November 3rd. I suspect the least preferred outcome for the market will be a disputed election outcome, with the prospect of it descending into worse political violence than what we've seen over the summer. 

Limiting Your Risk

In the video below, I discuss a simple way of limiting your market risk. The video mentions concentration risk, but the hedges will also protect against market risk. 

One suggestion I make in the video is to look at the nearest SPDR S&P 500 (SPY) options expiration date after the election: November 20th. As expected, the straight cost of the hedge expiring then was cheaper than that of one expiring six months out. Somewhat less expected was that the annualized cost of the November hedge was lower as well.