In response to President Donald Trump's promise to dispute the election outcome if he loses, “Wall Street's taking him at his word.”
Several market reports are noting that volatility markets from stocks to currencies and bonds show “investors bracing for turbulence not just on election day, but for the ensuing weeks as well.” The fear is that results from the Nov. 3 vote – already the most expensive event to hedge against ever – won't be clear enough that a winner emerges without a protracted legal battle.
For example, Bloomberg notes that, the election outcome itself, once you know it, that would have meaningful but not an oversize impact on the market. But the prospect of it becoming a “complete mess” is another element that people don't really know how to price.
There are a lot of factors pressuring the stock market right now and the potential for a hotly contested result is certainly one of them, especially as there is already “so much social tension,” said Mark Luschini, chief investment strategist at Janney.
Many argue now that an unknown election result is increasingly becoming conventional wisdom on Wall Street. “A contested election has become the baseline,” JPMorgan Chase strategist John Normand wrote in a recent note to clients.
The United States has seen bitterly disputed presidential election results in the past, and many remember that in 2000, it took weeks to decide the race between George W. Bush and Al Gore. Legal battles raged over the recount in Florida with the Supreme Court finally weighing in to stop the recount and award the election to Bush. Stocks slid throughout that period.
But 2020 is widely seen as a vastly different and more combustible environment, sparking growing unease among investors about the “impact of a muddled election result.”
The U.S. also continues to face a brutal pandemic that has killed more than 200,000 Americans and spurred a massive economic decline, Politico notes. While the backdrop in 2000 came amid a dot-com stock bubble in the process of deflating, the economy was still expanding.
“The fear is that if we get a disputed election, it could lead to disruption and possibly even violence. If so, we could well see markets take a significant hit,” Brad McMillan, chief investment officer at Commonwealth Financial Network, said. “In 2000, the hanging chad debacle in Florida hit markets, and this election could well be even more disputed than that one.”
Still, most Wall Street executives, traders and investment analysts widely expect the market environment to calm quickly after the election if the result is clear.
For example, markets could rally on a Trump win based on the expectation of continued low tax rates and a relaxed approach to corporate regulation. A Biden win, especially if Democrats also take the Senate, could spark a short-term sell-off on fears of increased taxes on corporations and the wealthy – though that possibility is increasingly baked into expectations. Certain sectors also could face new regulation, including banks.
However, a Biden win could also reduce some of the tension generated by Trump's trade wars and generally produce a less volatile daily political environment, tempering any initial sell-off. Total Democratic control would also likely lead to significant new fiscal stimulus, generally viewed as a positive on Wall Street.
But the fear that is growing more intense by the day is that markets will have no idea – perhaps for weeks or months—about who will get inaugurated next Jan. 20.
Numerous market reports see a “rush for volatility protection” well into December. Already, the “volatility futures curve remains elevated past the election.” Politico says.
Goldman Sachs cautioned Friday that a delayed outcome is only a “tail risk” and not the most likely outcome but markets have “even more to worry about right after the vote.” The Fed will meet the week of the election for the first time since 1984, while October's jobs report will be released that Friday.
Together, these uncertainties are forcing traders to protect against volatility weeks after the election passes, several reports say. November futures – which reflect the market's expectations for volatility through Nov. 18 – are more expensive than October, while December futures prices have been creeping higher as traders increasingly anticipate a delayed result.”
Even the Treasury market, where unprecedented Fed support has muted swings for months, is showing signs of anxiety, Politico says. Expectations for price volatility in three months versus four weeks are at a level only exceeded once in the past decade. Some traders have been buying options to hedge a potential rush of capital from investors fleeing stocks.
So, we will see. Wall Street's concerns are widely shared across the economy right now and the situation seems unlikely to calm itself in the near term. These are certainly fights producers should watch closely, and which are likely to be both contentious and bitter, Washington Insider believes.