Wall Street analysts gaming out potential post-ballot market reactions regard an unclear or contested outcome after the Nov. 3 presidential election as worst-case scenarios.
The most immediate concern would be a delay in delivering more pandemic aid. That would disappoint investors who’ve been counting on additional stimulus in the wake of the election, regardless of who wins, to help the economy recover from its coronavirus-induced malaise. It would also let down those betting a Democratic sweep of both the White House and Congress will release a torrent of government spending.
Fears about delayed results — including warnings from President Donald Trump — have been mounting. That’s due in part to an unprecedented surge in mail-in and early voting amid the pandemic, and as the U.S. copes with social unrest.
There’s a “terrifying risk” that an unresolved election could put investors in “completely uncharted territory,” Daniel Ahn, BNP Paribas chief U.S. economist, said by email. “If there is a constitutional crisis, we believe that the loss of political credibility and standing of the United States as a stable country could threaten its status as a safe haven with unfathomable consequences for the economy and for markets.”
For now at least, some investors are betting the worst-case scenario won’t play out. And the latest polls show Biden ahead of Trump by about 7 percentage points, according to averages of national surveys.
Open interest in put options on the Cboe Volatility Index now exceeds calls, which could indicate that investors are positioning for lower volatility after the election, according to Chris Murphy, co-head of derivatives strategy at Susquehanna International Group.
Even so, an outcome that isn’t immediately known is both “severely underappreciated” and the most likely scenario, according to Stefanie Miller, managing director at FiscalNote Markets.
“The Trump team has made it very clear that they intend to pursue as many legal avenues as possible to right the fraud they see inherent in the current system of mail-in/drop-off ballot casting,” Miller said by email. That means it’s reasonable to anticipate delays if hundreds of thousands of ballots are in question.
Read more: Supreme Court Maps Path Tha Could Help Trump Win Contested Race
With no clear winner, it would be very difficult to advance stimulus legislation through Congress during the weeks after the election, which would coincide with the holiday season, potentially jeopardizing a bounce in consumer spending, she warned. Miller sees the potential for stocks to drop in all sectors as investors aren’t accounting for that.
Bank of America’s U.S. economist Michelle Meyer and equity and quant strategist Savita Subramanian are warning that stocks could slide as much as 20% if there’s a contested election.
“A landslide victory for either Trump or Biden and rapid election conclusion would likely be welcomed by markets while a severely contested election could see risk-off and drive 10-year rates materially lower,” they wrote in a research report on Thursday.
Brian Gardner, chief Washington policy strategist at Stifel Nicolaus & Co., last week cautioned that markets may not be taking into account a closer-than-expected election and outlined a gamut of market reactions if what he referred to as “chaos” were to prevail in the wake of the Nov. 3 vote.
The strategist assigned a low-alert level if there’s a delay of a day or two, with a more serious alert level if in the event of something like what happened after 2000’s contest between George W. Bush and Al Gore. His risk list ratcheted up all the way to the chance that Congress would decide the election amid widespread riots and civil unrest.
“Markets may be in for a very choppy ride on Nov. 4 and possibly for much longer if it becomes clear that the election will be contested,” Wells Fargo banks analyst Mike Mayo wrote.
A disputed election could hurt bank stocks more than others, based on the three weeks after the disputed 2000 election, when banks shed 10% versus the broader market’s 5% drop, Mayo said.
While financial stocks could sell off significantly, there are some exceptions. Those that benefit from volatility, such as exchanges, may gain, according to Frederick Cannon, global director of research at Keefe, Bruyette & Woods. He recommends Intercontinental Exchange Inc. and MarketAxess Holdings Inc.
Other beneficiaries could include cryptocurrencies. A contested election might be good for the industry, as it would likely usher in a period of extended volatility and might rattle people’s faith in government and fiat currencies, Cannon said in recent interview phone interview. “A loss of trust is good for gold and crypto,” Cannon said.
MARKETS OVERVIEW: U.S. stocks slumped after earnings from the biggest tech companies disappointed investors concerned a slowing economy will damp profit.
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“Wall Street Votes” is a column highlighting opportunities for investors deluged with political news. It will be discontinued after Oct. 30.
— With assistance by Bailey Lipschultz
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