The stock market has dismissed the risk of prolonged upheaval from a contested election for now, with former Vice President Joe Biden garnering enough votes to win, but investors' outlook may turn from placid to volatile if aggressive legal challenges from the Trump campaign gain traction.
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The benchmark S&P 500 rallied 7.33% this week to near-record highs despite days of uncertainty before the outcome was projected on Saturday.
Elevated prices on volatility trades that once stretched through Inauguration Day have faded from the market, too, but that's no guarantee they won't return with lightning-like rapidity.
“The initial market reaction to an election result typically is not the one that proves enduring,” David Rosenberg, chief economist and strategist at Rosenberg Research, warned in a note to clients on Friday morning.
The Trump campaign vowed Saturday to press ahead with legal challenges in a number of key states, including Georgia, Michigan, Nevada, Pennsylvania and Wisconsin, meaning the final outcome might still be subject to change.
Additionally, the races for both Georgia Senate seats are headed for runoffs that won’t take place until January, leaving open the possibility Democrats and Republicans could split the upper chamber with tie-breaking votes cast by Vice President Kamala Harris, who has among the most liberal legislative records in the Senate.
The uncertainty from a viably contested election would likely result in a “sharp sell-off in equities,” Credit Suisse analysts wrote on Nov. 2.
Wall Street typically favors predictability, and the chasm between the two candidates' policies make the future -- particularly in terms of regulation -- nearly impossible to gauge if the future White House occupant is unknown.
Others on Wall Street, including analysts at Wells Fargo, warned the downside of a contested result would be “comparable to Bush v. Gore” when the S&P 500 fell 9% in the two months following the 2000 election.
The outcome of the race between former President George W. Bush and former Vice President Al Gore hung in the balance for five weeks as the candidates battled over vote-counting in Florida and now-infamous "hanging chads" on punch-card ballots.
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.”