Stockmarkets plagued by US presidential election anxiety

A contested result in the US presidential election could bring months of deadlock in the stockmarkets. Investors should prepare for volatility.

Is the US presidential election the “single biggest risk ever faced by financial markets”? That is the bold claim made by Australian broker CommSec, reports David Taylor for ABC News. In a “worst-case” scenario, a contested election could bring months of deadlock. CommSec economist Ryan Felsman notes that investors are responding by piling into derivatives, a form of financial insurance. That has sent prices soaring, making the 3 November vote “the most expensive event risk on record”. 

Last week, Donald Trump stoked markets’ anxieties when he refused to commit to a peaceful transfer of power if he loses the election. American stock indices have endured a poor month, with the S&P 500 down in each of the last four weeks. That has prompted a change of mood in financial markets, says John Authers on Bloomberg. Instead of asking whether the bull market has gone too far, some now ask whether “we might have taken things in completely the wrong direction”. 

Prepare for volatility

An election that takes weeks to resolve would not be unprecedented, notes Mark DeCambre for MarketWatch. In 2000, voting problems in Florida meant that the contest between George Bush and Al Gore was not over until the middle of December. The S&P 500 tumbled by more than 8% in the intervening period. In these more polarised times, there is a “real fear” that a repeat would bring civil disruption and “possibly even violence”, says Brad McMillan of the Commonwealth Financial Network. Financial advisers usually tell clients to ignore politics, but election anxiety is popping up in all sorts of assets, say Amrith Ramkumar and Julia-Ambra Verlaine in The Wall Street Journal. The price of VIX futures contracts maturing over the coming months, which traders buy as a form of protection against volatility, has spiked. The bets go beyond normal pre-election hedging, with investors buying derivatives linked to everything from the Japanese yen (a traditional safe haven) to gold. The real surprise may be if everything goes “more smoothly than expected”, triggering an end-of-year bounce.

Not so fast, says Colby Smith in the Financial Times. A peaceful election will not be enough to deliver a rally. A Survation poll of 91 investment professionals finds 60% expect Biden to prevail, but few are enthusiastic about his agenda, which will include tax rises and more regulation. Sixty percent say a Democrat “clean sweep” of the presidency and congress will be bearish for US stocks and only 15% are optimistic. 

A Christmas bounce?

Election anxiety is only one of the markets’ worries, says Michael Wilson in a Morgan Stanley note. A second wave of Covid-19 is affecting Europe and will surely head across the Atlantic. The next month and a half is likely to be volatile, but progress on finding a vaccine and post-election fiscal stimulus could make for a brighter Christmas. In the meantime, stay cautious, says Cormac Mullen on Bloomberg. The consensus is that “US equities are set for a steady grind lower, at least until the election fog clears”.

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