Several things can affect the stock market and the political climate of the country is one of them. As we are all aware, the US went to the polls on last week on November 3, 2020, and although the race was “called” after Democrat Joe Biden was projected to win, President Donald Trump has refused to concede defeat and he is planning to take legal action for he feels that there was fraud in the election.
Trump’s legal fight for the outcome of this election will prove stock market quicksand, investors worry.
Robert “Bob” C. Doll, a senior portfolio manager and chief equity strategist at Nuveen says that the markets can live with Joe Biden’s presidency and Republican Senate.
The risk of prolonged turmoil from a contested election has been dismissed but the stock market has for now, with Biden gathering enough votes to win, but investors’ outlook may turn from placid to volatile if President Trump aggressively pushes his proposed legal fight.
During the days before Biden was projected to win the presidential election on Sturdy afternoon, the benchmark S&P 500 rallied 7.33% to near-record highs. Trump even tweeted about it yesterday Monday, November 9, 2020.
Although the S&P 500 surged, elevated prices on volatility trades that once stretched through Inauguration Day on January 20, 2020, have faded from the market, but they are expected to return with lightning-like rapidity.
In a note to clients on Friday, November 6, 2020, David Rosenberg, the Chief Economist, and Strategist at Rosenberg Research advised that the way the stock market reacts to the election result does not prove endurance in the market.
“The initial market reaction to an election result typically is not the one that proves enduring,” Rosenberg cautioned.
Wall Street favours a divided government and here is why
Shortly after media houses in the US “called” the race on Sturdy after determining there was no longer a mathematical way Trump could win the election, he vowed to take the matter to the Supreme Court to seek justice against fraud orchestrated by Biden’s team.
The highly contested key states that face this legal action include Georgia, Michigan, Nevada, Pennsylvania, and Wisconsin, so the election results from these states might still be subject to change.
There will also be runoffs for Georgia Senate seats until January 2021, so the possibility that Democrats and Republicans could split the upper chamber with tie-breaking votes cast by Vice President-elect Kamala Harris is still very much open.
Last week on Monday, November 2, 2020, analysts at Credit Suisse Group AG, a Swiss global wealth manager, investment bank and financial services firm predicted that the uncertainty from this election would likely result in a “sharp sell-off in equities.”
Wall Street typically favours divided government because it makes it nearly impossible to predict the future of the stock market when the future President is unknown. Currently, Trump’s regulation policies differ from President-elect Joe Biden’s whose tax plans caught the eye of many investors during his campaigns.
Other Wall Street analysts warned that the disadvantage of this contested election result would be “comparable to Bush v. Gore” dispute in 2000 when the S&P 500 fell 9% in the two months following that year’s election.
Stock market predictor of election outcome too close to call
At present, 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.
Long-term uncertainty, to be sure, is not what traders expect at this point. 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.
“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.”