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Markets want anything except uncertainty as US heads to the polls

As American vote in this year's volatile election, traders seem to want any result as long as it is a clear one

US election

US voters are currently voting in what has become one of the most volatile elections in the country’s recent history, with Democratic presidential candidate Joe Biden hoping to oust Republican incumbent Donald Trump.

While at the start of the year many were expecting a close-run election, with Trump favoured to win re-election on the back of a healthy stock market and incumbent advantage. However, the coronavirus pandemic, social unrest and a collapsing economy saw Biden take a polling lead in the early summer that he has maintained through most of the campaign.

READ: For Apple, Google and the rest of Big Tech, a Biden election victory could be the worst outcome

Polling averages on election day put Biden at just over 51% of the national vote compared to just over 43% for Trump. Biden is also leading in a number of key battleground states that will decide the election such as Pennsylvania, Wisconsin and Michigan, all of which went for Trump in 2016. However, as election day has dawned some of these states are tightening, indicating a closer contest than perhaps initially expected.

With Biden the favoured presidential candidate, the Democrats are also hoping that they will be able to take control of the US Senate from the Republicans, who currently control 53 seats in the 100 seat chamber. A so-called ‘Blue Wave’, where Democrats control the Senate, the House of Representatives and the presidency, would allow the party to exert substantial control over policy and law-making with little Republican opposition.

However, repeated (albeit unfounded) accusations by Trump that the election will be rigged if the results do not fall in his favour, as well as the recently installed 6-3 conservative majority on the Supreme Court have many voicing concerns the aftermath of election day could see social unrest across the US, particularly in the event of a close and/or unclear result.

With turnout looking to be its highest in over a century, as well as larger than usual numbers of postal votes, the result may not be clear until days after the polls close, making uncertainty or accusations of vote-rigging more likely, from the Trump camp at least.

“The biggest risk to investors is likely to come if there is not a smooth transition of power and the outcome of the election is contested, which is likely to cause an extended period of volatility on US financial markets. A major dip in the stock market, however, could prompt the Federal Reserve to step in with extra stimulus to stem a dramatic sell-off. Although Congress has so far failed to reach an agreement on an emergency plan to inject cash into the US economy, it was partly under an expectation of fresh spending that the tech sector made up ground from its September slide”, said Susannah Streeter at Hargreaves Lansdown.

“The key is to spread the risks so your holdings aren’t over-dependent on one US election outcome or the other to prosper…Given, the potential of a contested election and an extended period of volatility, investors may also want to consider widening a portfolio to contain defensive stocks like utilities, insurers and other assets considered a safe haven such as gold, which could also act as a hedge against a possible rise in inflation down the road if a large stimulus plan is agreed. But it would also be prudent to maintain a healthy cash balance, as a buffer against unforeseen consequences.’, she added.

This uncertainty appears to be playing out among many traders over the electoral season, with Matthew Leibowitz, founder and chief executive of US stock trading app Stake saying the company has seen many of its users "pulling into passive [exchange traded funds (ETFs)] or increasing their concentration in gold to manage potential market volatility."

However, the CEO added that the firm has also seen a "threefold increase in trading more exotic instruments like active and inverse ETFs" as some customers pursued "outsized opportunity in the midst of uncertainty".

"Based on a user poll earlier this month, a majority of the [200,000] investors on Stake are expecting a tight Biden win but still aren't counting out other scenarios. Regardless of the final outcome, more volatility and uncertainty could well be on the cards - and for traders and investors, that could mean more opportunity", Leibowitz concluded.

Biden win could bring both good and bad news

If Biden manages to secure to victory in the election, which based on current polling appears to be the most likely outcome, earnings compression could be seen across multiple firms, however, investors could take advantage of what is likely to be a heavy stimulus package to boost the US economy out of its slump.

“If former Vice President Joe Biden wins the upcoming election and the Democrats also control Congress, his corporate tax plans alone could result in a 7-8% decline in [S&P 500] earnings. However, on the flipside, a ‘blue wave’ could result in significant stimulus – potentially upwards of US$3trn. While stimulus of such size may have repercussions needing to be dealt with three or four years from now, in the immediate term, it would clearly result in higher growth”, said Taymour Tamaddon, a portfolio manager of the T. Rowe Price US Large Cap Growth Equity Fund.

“This stimulus is why equity markets are not pricing in the clear negative implications of higher taxes. In addition, there is a belief not all the tax changes Biden is proposing would be enacted. In any event, the Senate race is going to be remarkably close, and if we see a ‘blue wave’, Democrat senators from historically Republican states may not be comfortable with significant tax increases”, the portfolio manager added.

Marshall Gittler at CFD broker BDSwiss also said that a ‘blue wave’ outcome will “be the most “risk-on” because it would result in the most fiscal stimulus”.

“The Fed staff's model of the US economy shows that an additional US$2trn stimulus package, which is what the Democrats have suggested, could raise real GDP growth next year by about 5 percentage points, adding 3mn, and lower the unemployment rate by nearly 2 percentage points. No wonder even traditionally Republican-friendly Wall Street seems to be OK with this prospect”, he added.

Trump win and/or a Republican Senate will bring its own benefits and pitfalls

While much of the polling (if you believe it) indicates that Trump is unlikely to secure victory, if the president does manage to pull off yet another upset markets could find themselves facing a different set of potential opportunities and drawbacks.

One positive in the event of a Trump victory, which if coupled with continued Republican control of the Senate would effectively see a continuation of the status quo, is likely that equity valuations will be supported by the removal of regulatory and tax burdens, although a much lower level of stimulus would be the trade off.

Markets.com’s Neil Wilson highlights that a Trump victory and Republican Senate hold could also see the dollar “outperform in the near term with a strong post-election euphoric bounce until stronger economic, monetary and fiscal trends are reasserted”. He added that continued support for domestic US oil production could cause a fall in oil prices, while victory would also likely bolster the president’s belligerent attitude to global trade.

Wilson continued by saying that if Biden should win the presidency but Republicans maintain Senate control, trade policy was likely to be less uncertain, although delays in stimulus measure implementation amid partisan wrangling could “create near-term volatility”.

--Updates polling figures, adds Stake CEO commentary--

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