Take a deep breath.
After all, it could be a topsy-turvy week for investors as remaining voters go to the polls on Tuesday, with little certainty over when a victor in one of the most bitter and most litigated presidential elections in U.S. history will be declared.
Here’s a look at what investors in stocks and other assets are bracing for in the electoral aftermath:
Worst scenario: ‘unclear outcome’
The prospect of a more contentious repeat of the drawn-out fight that followed the 2000 presidential election have investors more worried about a contested outcome than an outright win by either Democratic challenger Joe Biden or President Donald Trump, analysts said.
“A clear victory is most important for this election, with the worst scenario being an unclear outcome and that creates uncertainty,” said Anis Lahlou, chief investment officer of the Aperture European Innovation Fund, in emailed comments.
Biden maintained a lead over Trump in national polls, with a final Wall Street Journal/NBC News survey published Sunday showing the Democrat with a 52%-42% advantage over the incumbent, little changed from mid-October. Polls in battleground states that could determine the outcome in the electoral college continued to favor Biden overall, but have tightened.
Stocks were mostly higher on Monday, with the Dow Jones Industrial Average
up around 303 points, or 1%, while the S&P 500
was up 0.7%. The Nasdaq Composite
stumbled, falling 0.4%. All three indexes on Friday logged their biggest weekly falls since the depths of the pandemic-induced bear market in March, with weakness tied to worries over the rise in COVID-19 cases in the U.S. and Europe and pre-election jitters.
The fear of uncertainty, analysts said, is reflected in part by elevated volatility measures. The Cboe Options Exchange’s closely followed Volatility Index
a measure of expected S&P 500 volatility over the coming 30 days, stands at more than 30 versus is long-term average near 19. VIX futures contracts show investors don’t expect volatility to subside right away.
So if a contested outcome is the worst case, what’s the best case?
Since late summer, the market has appeared to respond best to signs of a clear-cut win for Biden accompanied by a Democratic takeover of the Senate, a so-called blue wave scenario, analysts said.
Previously, investors had appeared more wary of a Biden victory, due in part to his pledge to raise the corporate income tax cut delivered by Trump and congressional Republicans in 2017.
It’s that fear of uncertainty that partly explains why investors appeared to warm up to the prospect of a Biden victory, analysts said. Around early September, stocks began to show more positive correlation with Biden’s standing in the polls, a reversal from the earlier pattern, said Eric Lascelles, chief economist at RBC Global Asset Management, in an interview.
The shift also came as congressional wrangling over another round of coronavirus aid spending dragged out on Capitol Hill. While Trump, after initial resistance, subsequently called for a spending package even larger than the $2 trillion plan pushed by House Democrats, the two sides were unable to come to an agreement. And even if they had, opposition by Senate Republicans to another big-ticked round of spending were seen making passage of a large plan unlikely.
Given fears of the renewed spread of the virus would further threaten the economy’s rebound from the pandemic, the focus for investors shifted to stimulus prospects.
The “main” election question for investors “seems to be if federal economic support can arrive in January 2021 and counter the effects of a COVID infection surge,” said Paul Christopher, head of global market strategy at Wells Fargo Investment Institute, in a note late last week.
As a result, investors have appeared to cheer prospects for a blue wave that would see Democrats move to quickly implement a large, multi-trillion-dollar round of aid by early next year.
But the next most favorable outcome for stocks could be a Trump victory that sees Republicans retain control of the Senate (Democrats are seen as almost certain to retain control of the House).
“A victorious President Trump will be anxious to get the economy moving, and a large stimulus would undoubtedly be central to economic recovery,” said Thomas Block, policy analyst at Fundstrat Global Advisors, in a Monday note.
In that scenario, there would…