As the U.S. presidential election approaches, investors are increasingly alert to the possibility of a contested outcome that could disrupt the current stock market rally. With less than a month to go, polls indicate a near tie between Democrat Kamala Harris and Republican Donald Trump, leading to heightened speculation about the implications of a close race.
A recent Reuters/Ipsos poll shows Harris leading Trump by a slim margin of 46% to 43%, reflecting a tightening contest compared to earlier polls. Given Trump’s previous attempts to overturn the results of the 2020 election, investors are wary that any close results might similarly be disputed this year. Furthermore, control of Congress hangs in the balance, adding another layer of uncertainty to the electoral process.
“This election is poised to be extremely close, which increases the likelihood of some type of dispute occurring,” said Walter Todd, chief investment officer at Greenwood Capital. He warned that uncertainty surrounding the election outcome could lead to a sell-off if results remain unclear for several days.
Despite these concerns, strong economic growth has kept investor enthusiasm high, with the S&P 500 up 21% so far this year and set for another year of double-digit gains. However, the upcoming election is clearly on the market’s radar. The Cboe Volatility Index, which gauges options demand for protection against stock fluctuations, has increased by about six points since September, reflecting rising expectations for market turbulence.
Options markets also indicate growing apprehension regarding “tail risk”—a market shock stemming from unlikely but impactful events. The Nations TailDex Index recently reached its highest level in a month, signaling investors’ fears about potential electoral chaos.
Michael Purves, CEO of Tallbacken Capital Advisors, cautioned that the true risks may extend beyond election day. “The concern isn’t just the outcome, but the possibility of the election being deemed invalid by a significant portion of the population,” he said. A litigated result could lead to considerable market volatility.
Historical precedents for contested elections are limited. Following Trump’s efforts to contest the 2020 election, markets largely remained unaffected, with U.S. stocks rallying even after Biden was not declared the winner until several days later. However, investors may not be as confident this time, especially if either party escalates challenges to close results in key swing states.
The election of 2000, marked by a protracted dispute between George W. Bush and Al Gore, serves as a cautionary tale. During that period, the S&P 500 dropped 5% from election day until Gore conceded in mid-December, illustrating the potential for significant market declines amid electoral uncertainty.
Such volatility could overshadow what is typically a strong period for equities during election years. Historically, the S&P 500 has gained an average of 3.3% in the final two months of presidential election years since 1952, rising 78% of the time, according to Keith Lerner, co-chief investment officer at Truist Advisory Services.
To navigate potential election-related volatility, Purves recommends that investors consider hedging strategies, such as put contracts, which increase in value when stock prices decline. Kurt Reiman of UBS Wealth Management advises keeping a balanced approach, suggesting utility stocks and gold as safer investments in case of a contested vote.
Despite the looming uncertainties, Stephanie Aliaga, global market strategist at JPMorgan Asset Management, believes any volatility caused by a contested election would likely ease once the results are finalized. “Elections create uncertainty, but election results ultimately diminish that uncertainty,” she noted, often leading to a post-election rally as clarity returns to the market.
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