Investors are currently dealing with U.S. economic uncertainty, changes in Federal Reserve policy, and the impending presidential election, which are all contributing to increased demand for portfolio hedging.

What Happened: The Cboe Volatility Index (.VIX), a barometer for protection against stock swings, stands around 20, a significant rise from the 2024 average of 14.8. This increase is common in election years as investors consider the market implications of policy proposals from candidates, Reuters reported on Tuesday.

However, this year, political concerns are coinciding with other volatility triggers, such as fears of a weakening U.S. economy and uncertainty over the Fed's need to cut interest rates. The S&P 500 saw its worst weekly percentage loss since March 2023 last week, following a second consecutive disappointing jobs report.

Despite the S&P 500 still being up nearly 15% this year, the market remains uncertain. Matt Thompson, co-portfolio manager at Little Harbor Advisors, stated, "The market is essentially saying, we know risk is elevated, but ... we don't know what the problem is going to be."

With volatility already high, the "election bump" in October VIX futures, which also include the Nov. 5 vote, is much smaller than in previous years. The gap between the contracts with the highest and lowest volatilities is barely above 1 volatility point.

Investors have been focusing on the VIX in recent weeks, especially after the index posted its largest-ever one-day spike on Aug. 5, during a sharp market sell-off. Although volatility subsided within days, the index has risen again as markets have become choppy.

Societe Generale analysts advised investors on Monday to stay hedged for the next three to six months, warning of possible volatility from unpleasant economic surprises and geopolitical factors such as U.S. elections and conflict in the Middle East and Ukraine.

Why It Matters: The upcoming presidential election is causing a stir among investors. A CNBC survey found that 67% of investors believe former President Donald Trump would be more beneficial for stocks. This sentiment is based on historical performance, with the S&P 500 and Nasdaq seeing significant gains during Trump's tenure.

Trump also claimed that if Kamala Harris wins the election, there will be a 1929-like market crash.

Furthermore, Silicon Valley is expressing concern over a tax proposal, whether it is a part of Harris' economic plan or a continuation of Joe Biden's. The tax plan in question is a tax on unrealized capital gains, causing anxiety among the tech elite.