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.”
S&P 500's monthly drop could see more pain with contested election, BofA says
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.
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.