The baseball regular season came to an end yesterday and the Chicago Cubs are positioned to make a historic run that most expect will end in a World Series victory. See what happens when a trader takes control of a team….
Since many people thought this would never happen, it may also be thought of as a black swan event and we all know that black swans have a dramatic impact on market volatility and show up in an elevated level for the Chicago Board Options Exchange Volatility Index, commonly known as VIX. So I ask the question that I care the most about, “How does a Cubs World Series victory impact VIX?”
First, and most obvious, is there will most likely be a lack of liquidity the day after the Cubs end over a century of futility. I was on the trading floor when the Bulls won their first championship and many traders, brokers, and clerks (mostly clerks) were mysteriously sick the day after this Bulls win. Most of the traders and brokers were up past their bedtimes, while the clerks were wreaking havoc outside whatever bar they were watching the game. In that case, I know of a few that caused enough damage that their sick day was more about finding someone to bail them out.
Second, when there is one outlier event, traders start speculating on another outlier event. Keep in mind that the World Series will end just before the next presidential election. You may hear things like, “If the Cubs can win, why can’t Donald Trump win?” This was a topic that came up a few times at our Risk Management Conference last week. The feeling was a Trump victory may create more uncertainty in the equity markets than a Clinton victory. If traders agree with this line of thinking then it will have an impact on VIX, most likely solidifying a move to a higher volatility regime.
(As a note, in this day and age it is impossible to mention a candidate’s name without alienating a large group of people, I’m just repeating things I heard at the conference and making no endorsement).
Finally, we need to consider what happens to the markets if hell freezes over. This is a tough one to speculate on, but if this happens, I’m guessing it would need to stop accepting new arrivals to clean up. This might result in fewer deaths and longer life spans. Also, if the king of darkness is busy worrying about pumping water out of his basement, he may stop whispering in trader’s ears about a potential market sell off. Whatever negative things that happen on earth due to his influence will probably cease to occur. This temporary calm, depending how long it lasts, may even result in a drop for VIX below 10. Something that hasn’t happened in over a decade, but more recently than a Cubs World Series win.
Needless to say, a Cubs World Series victory will have an impact on Chicago and the rest of the world. It will be an unexpected outlier of an event, but will also put an end to futility that is sometimes beyond explanation. As far as the impact on VIX, it is anyone’s guess, I can make an argument either way.