The VIX closed at 21.15 on Monday, Nov. 2, then fell to 16.61 by Wednesday, Nov. 4, below its 16.91 close on Oct. 28, the day the Bank of Canada raised its overnight rate to 2.5%. The investors most exposed to that reversal were the ones who acted on the first number.
The S&P/TSX Composite rose 2.28% to 36,341.40 on Nov. 4, its biggest one-day gain in seven months, after Democrats won control of both houses of Congress. WTI crude settled down 8.29% at $88.12, gold rose 3.29% to $4,070.20, and the S&P 500 gained 1.58%.
The pattern has a name. It is loss aversion operating on a short evaluation window, and it explains why a dated event with an unknown outcome produces selling before the outcome arrives.
Myopic Loss Aversion Priced the Week Before the Vote
Daniel Kahneman and Amos Tversky, publishing prospect theory in 1979, showed that people weigh losses more heavily than equivalent gains. Shlomo Benartzi and Richard Thaler extended the idea in 1995 with myopic loss aversion, the combination of loss aversion and frequent portfolio evaluation. They found that the historical equity premium fits prospect theory if investors evaluate their portfolios about once a year. Shorten the window and equities feel riskier than their long record warrants.
October supplied the short window. The VIX rose from 14.84 on Oct. 9 to 21.15 on Nov. 2, a gain of 42.5%, across a stretch that included the Federal Reserve holding at 3.75% to 4.00% in a 10-2 vote on Oct. 28, with Governor Lisa Cook and Cleveland Fed President Beth Hammack dissenting in favour of a hike. The Bank of Canada raised its rate the same day, after a September inflation reading of 3.1% driven by gasoline up 27.8% from a year earlier.
The VIX then gave back about 70% of its October climb in one session. The index fell from 20.83 on Nov. 3 to 16.61 on Nov. 4, against a rise of 5.99 points from the Oct. 9 low. The path below shows how little time the relief took compared with the fear.
The VIX measures 30-day implied volatility on S&P 500 options. The Oct. 28 marker coincides with the Bank of Canada hike and the Federal Reserve hold, and the Nov. 3 marker is the U.S. midterm election date.
The Narrative Arrived Before the Evidence
By the close on Nov. 4, the market had settled on a story. Andrew Slimmon of Morgan Stanley Investment Management and Jay Woods of Freedom Capital Markets both framed a divided Congress as gridlock, which has historically been good for stocks. Jordan Watson of Tandem Investment Advisors cautioned that the rally, and the rotation away from AI-linked stocks, could prove temporary.
The largest single price move that day was not in equities. WTI fell 8.29% after Vice President JD Vance blamed the Iran war, which has pushed up inflation, for Republican losses. Thierry Wizman of Macquarie Group said the biggest policy effect could be slower data center construction. A single clean cause is attractive because it compresses a multi-variable move into one sentence, and that compression is where overconfidence enters.
Brad Barber and Terrance Odean documented the cost of overconfidence in trading in 2000. Among 66,465 households at a large discount broker during 1991 to 1996, those that traded most earned 11.4% a year while the market returned 17.9%. The most active traders were not short of information. They were short of restraint at the moment the story felt most certain.
What the Volatility Curve Still Says
The spot VIX at 16.61 sits below the longer-dated readings. The three-month VIX closed Nov. 4 at 18.80 and the one-year at 21.83, so the options market is still pricing more turbulence than the election relief suggests. The next dated tests are the Bank of Canada decision on Dec. 9 and the Federal Reserve meeting on Dec. 8 and 9. Before the Oct. 28 meeting, CME FedWatch put the odds of a December Fed hike at 73%, according to Kiplinger.
The Canadian rate path adds a second pressure. Markets price four quarter-point Bank of Canada hikes by the end of 2027, counting the Oct. 28 move, which would take the policy rate to 3.25%. In a Reuters poll of 29 economists conducted Oct. 21 to 23, 16 expected another hike before the end of March 2027.
Mental accounting, the concept Thaler developed to explain how households sort money into separate mental budgets, predicts that a fixed monthly payment is tracked apart from portfolio value. On a $500,000 variable-rate mortgage at prime minus 0.50%, the monthly payment rises from about $2,617 to $2,685, an increase of $68. A payment that size can drive behaviour that a 2.28% portfolio gain does not, which is why the week held two kinds of pressure that the market index could not show.