By Lewis Krauskopf and Saqib Iqbal Ahmed
NEW YORK (Reuters) – A tight U.S. presidential race has some investors bracing for an inconclusive or disputed election outcome that could disrupt this year’s booming stock market rally.
With less than a month before the election, polls and prediction markets show Democrat Kamala Harris and Republican Donald Trump in a virtual dead heat. Harris led Trump by a marginal 46% to 43% in a Reuters/Ipsos poll released on Tuesday, a tighter race than the same poll showed a few weeks earlier.
Given Trump’s efforts to reverse his 2020 loss to President Joe Biden, investors expect any good outcome could also be contested this year. The balance of power in Congress is also at stake, with a number of potentially tense conflicts that could increase uncertainty.
“This will be a very close election. It goes without saying that the likelihood of some sort of dispute occurring is higher than average,” said Walter Todd, Chief Investment Officer at Greenwood Capital. He expects the shares to sell off if the outcome remains doubtful for more than a few days.
“Markets don’t like uncertainty, and they certainly wouldn’t like us not knowing who the president of the United States is for a day or two after the election,” Todd said.
For now, political uncertainty appears to be doing little to dampen enthusiasm for stocks, as strong U.S. economic growth has helped the S&P 500 reach new highs. The benchmark index is up 21% so far this year and is on track for a second straight year of double-digit gains.
That’s not to say the election isn’t on investors’ radar. The Cboe Volatility Index, which measures demand for options to protect against stock moves within a 30-day period, is up about 6 points from its September low and now stands at 20.9 – a level typically associated with moderate to higher expectations of market turbulence. Part of the index’s rise can be attributed to the approaching elections, investors say.
The options markets also reflect increased concerns about tail risk: a market shock resulting from an unlikely but highly impactful event. The Nations TailDex Index, a measure of this risk, recently reached its highest level in a month.
Michael Purves, CEO of Tallbacken Capital Advisors, believes investors are too focused on the days before and immediately after the election, when contentious elections could roil markets in the weeks after November 5.
“It’s not so much about the outcome, but about the potential risk the morning after that the election will not be considered valid by a large part of the population,” he said. “That to me is a real risk … a lawsuit that will probably sell off the stock market.”
There are few recent precedents for contested elections.
Markets were largely unaffected by Trump’s attempt to overturn the outcome of the 2020 election. US stocks rose in the remaining trading days of the week after Election Day, even though Biden was not officially declared the winner until that weekend.
But investors may be less optimistic this time around, especially if a challenge to a close result by either party gains traction among fellow lawmakers and election officials in swing states.
Trump and his allies have signaled for months that they would contest defeat, repeatedly claiming they fear large numbers of noncitizens will vote, even though independent and state assessments show the practice is extremely rare.
Stocks fell sharply in late 2000, when the race between George W. Bush and Al Gore remained undecided for over a month after a challenge from Gore’s campaign based on disputed results in Florida, the clearest example of a contested election in recent American history. .
From Election Day 2000 until Gore conceded in mid-December, the S&P 500 fell 5%, as sentiment was also weighed down by unease about technology stocks and the broader economy. The index fell by 7.6% in 2000 over the entire November/December period.
Such volatility could cloud the outlook for what has typically been a strong time for stocks in election years. The S&P 500 has risen an average of 3.3% in the final two months of presidential elections since 1952, according to Keith Lerner, co-chief investment officer at Truist Advisory Services.
Purves, of Tallbacken Capital, advises investors to hedge potential election-related volatility through put contracts, which rise in value when stocks fall.
Kurt Reiman, head of Fixed Income Americas and co-leader of the ElectionWatch at UBS Wealth Management, remains broadly positive on equities, but he said investors should consider popular havens such as utility stocks and gold to buffer portfolios against a tight or contested mood.
Stephanie Aliaga, global market strategist at JPMorgan Asset Management, said the volatility caused by a potentially contentious election is likely to ease once uncertainty subsides.
“Elections create uncertainty, but election results ultimately diminish and reduce that uncertainty,” she said. “Ultimately you get a boost or rally that almost seems after the elections, because the uncertainty has been removed.”
(Reporting by Lewis Krauskopf and Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Leslie Adler)
