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 * U.S. Markets
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RISKS FROM POTENTIALLY CONTESTED US ELECTION APPEAR ON MARKET'S RADAR

By Lewis Krauskopf and Saqib Iqbal Ahmed
October 10, 20247:09 AM GMT+2Updated a day ago
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U.S. Vice President Kamala Harris in Milwaukee, Wisconsin, U.S. August 20, 2024
and former U.S. President Donald Trump in Bedminster, New Jersey, U.S., August
15, 2024 are seen in a combination of file photographs. REUTERS/Marco Bello,
Jeenah Moon/File Photo Purchase Licensing Rights, opens new tab
NEW YORK, Oct 10 (Reuters) - A tight U.S. presidential race is leading some
investors to brace for an unclear or contested election result that could trip
up this year’s booming stock market rally.
With less than a month before the election, polls and prediction markets show
Democrat Kamala Harris and Republican Donald Trump in a virtual dead heat.
Harris led Trump by a marginal 46% to 43% in a Reuters/Ipsos poll released on
Tuesday, a tighter race than the same poll showed a couple weeks earlier.
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Given Trump's efforts to overturn his loss to President Joe Biden in 2020,
investors expect any close outcome might also be contested this year. The
balance of power in Congress is also at stake, with a number of potentially
close contests that could ratchet up uncertainty.
"This is going to be a very close election. It just stands to reason that the
likelihood of some type of dispute occurring is higher than it is on average,"
said Walter Todd, chief investment officer at Greenwood Capital. He expects
stocks to sell off if the result is in doubt for more than a few days.
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"Markets do not like uncertainty, and they certainly would not like the fact
that we don't know who the president of the United States is a day or two after
the election,” Todd said.
For now, political uncertainty appears to be doing little to dampen enthusiasm
for stocks, as strong U.S. economic growth has helped the S&P 500 power to fresh
highs. The benchmark index is up 21% so far this year and on track for a second
straight year of double-digit gains.

That’s not to say the election isn’t on investors' radar. The Cboe Volatility
Index (.VIX), opens new tab, which measures options demand for protection
against stock swings within a 30-day period, has risen about 6 points from its
September lows and now stands at 20.9 - a level typically associated with
moderate to higher expectation for market turbulence. Some of the index's rise
is attributable to the looming election, investors say.

Options markets also reflect increased concerns about tail risk - a market shock
due to an unlikely but highly impactful event. The Nations TailDex Index
(.TDEX), opens new tab, a measure of such risk, recently hit its highest level
in a month.
Michael Purves, CEO of Tallbacken Capital Advisors, believes investors are too
focused on the days before and immediately after the vote, when a contested
election could roil markets in the weeks after Nov 5.

"It's really not so much about the outcome as it is about the potential risk of
the morning after, of the election not being considered valid by a large part of
the population," he said. "That to me is a real risk ... a litigated outcome,
where the stock market probably sells off."
Recent precedents for challenged elections are few.
Markets were largely unperturbed by Trump’s attempt to overturn the results of
the 2020 election. U.S. stocks rallied in the week's remaining trading days
after election day, even though Biden wasn't officially declared the winner
until that weekend.
But investors might be less sanguine this time around, especially if a challenge
to a close result by either party gains traction with fellow lawmakers and
election officials in swing states.
Trump and his allies for months have been signaling that they would challenge a
defeat, claiming repeatedly that they are worried that large numbers of
noncitizens will vote, though independent and state reviews show this practice
is vanishingly rare.
Stocks notched sharp declines in late 2000, when the race between George W. Bush
and Al Gore was undecided for more than a month after a challenge from Gore’s
campaign based on disputed results in Florida, the clearest example of a
contested election in recent U.S. history.
From election day of 2000 until Gore conceded in mid-December, the S&P 500
slumped 5%, when sentiment was also weighed down by unease about technology
shares and the broader economy. The index slid 7.6% for the November/December
period overall in 2000.
Such volatility could cloud the outlook for what has tended to be a strong time
for equities in election years. The S&P 500 (.SPX), opens new tab has gained an
average of 3.3% in the last 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.
Purves, of Tallbacken Capital, advises investors to hedge potential
election-related volatility through puts contracts, which gain in value when
stocks fall.
Kurt Reiman, head of fixed income Americas and co-lead of the ElectionWatch at
UBS Wealth Management, remains broadly positive on stocks, but he said investors
should consider popular havens such as utility stocks and gold to buffer
portfolios against a close or contested vote.
Stephanie Aliaga, global market strategist at JPMorgan Asset Management, said
whatever volatility a potentially contested election causes would likely be
mitigated once the uncertainty subsides.
"Elections create uncertainty, but election results ultimately diminish and
reduce that uncertainty,” she said. “At the end of the day you do end up with
this almost post-election boost or rally because the uncertainty is cleared."

Get a look at the day ahead in U.S. and global markets with the Morning Bid U.S.
newsletter. Sign up here.

Reporting by Lewis Krauskopf and Saqib Iqbal Ahmed; Editing by Ira Iosebashvili
and Leslie Adler

Our Standards: The Thomson Reuters Trust Principles., opens new tab

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