Nuveen chief equity strategist Bob Doll discusses the markets' reaction to delays in the presidential and congressional election results.
The stock market has dismissed the risk of prolonged upheaval from a contested election for now, as former Vice President Joe Biden extends his lead in several hard-fought states, but investors' outlook may turn from placid to volatile if aggressive legal challenges from the Trump campaign gain traction.
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The benchmark S&P 500 rallied 7.33% this week to near-record highs despite days of uncertainty about who won the White House with outcomes in several electoral vote-rich states being too close to call.
Elevated prices on volatility trades that once stretched through Inauguration Day have likewise faded from the market, but that's no guarantee they won't return with lightning-like rapidity.
“The initial market reaction to an election result typically is not the one that proves enduring,” David Rosenberg, chief economist and strategist at Rosenberg Research, warned in a note to clients on Friday morning.
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The Trump campaign is pressing ahead with legal challenges in a number of key states, including Georgia, Michigan, Nevada, Pennsylvania and Wisconsin, meaning even if Biden wins the vote count, the final outcome might still be subject to change.
Additionally, the races for both Georgia Senate seats look likely to be headed for runoffs which won’t take place until Jan. 5, leaving open the possibility Democrats and Republicans could split the upper chamber with tie-breaking votes cast by a potential Vice President Kamala Harris, who has among the most liberal legislative records in the Senate.
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The uncertainty caused by either scenario would likely result in a “sharp sell-off in equities,” Credit Suisse analysts wrote on Nov. 2.
Wall Street typically favors predictability, and the chasm between the two candidates' policies make the future -- particularly in terms of regulation -- nearly impossible to gauge if the White House occupant is unknown.
Others on Wall Street, including analysts at Wells Fargo, warned the downside of a contested result would be “comparable to Bush v. Gore” when the S&P 500 fell 9% in the two months following the 2000 election.
The outcome of the race between former President George W. Bush and former Vice President Al Gore hung in the balance for five weeks as the candidates battled over vote-counting in Florida and now-infamous "hanging chads" on punch-card ballots.
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Protracted delays may become more likely as Trump’s legal challenges press ahead, if margins remain narrow and lawsuits succeed in eliminating large swaths of ballots. A recount is likely in Wisconsin and officials in Georgia, where Biden leads by just 7,000 votes, have already said one will be conducted there.
Stocks in this Article
$28323.4
-66.78 (-0.24%)
$3509.44
-1.01 (-0.03%)
$11895.229592
+4.30 (+0.04%)
Extended delays are not what traders expect at this point, though. S&P 500 volatility contracts are trading near 17 for Thanksgiving and 22 through Inauguration Day, down from the low 30s and around 24, respectively.
Volatility typically trades in the high teens during periods of calm.
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“What we come out of this election with is more evidence of a nation not just divided but polarized to an extreme,” Rosenberg said. “Not the first time this has ever happened, mind you, and this era of ultimate discord shall pass. But nobody comes out of this election very happy.”
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