Wall Street faces 20 per cent fall with contested election, analysts warn

Markets want to see a clear victory for either President Donald Trump or Democratic nominee Joe Biden within a week of the November 3 election. If there’s a contested outcome, stocks could slide as much as 20 per cent.

That’s according to a team of Bank of America economists and strategists led by US economist Michelle Meyer and equity and quant strategist Savita Subramanian. A “landslide victory for either Trump or Biden and rapid election conclusion would likely be welcomed by markets, while a severely contested election could see risk-off and drive 10-year rates materially lower,” they wrote in a research note.

A rocky transfer of power or limbo until December, or even until the inauguration on January 20 would make for a worst-case scenario for markets.

Give us certainty: Wall Street doesn't have much patience for a hung election outcome.
Give us certainty: Wall Street doesn’t have much patience for a hung election outcome.Credit:AP

“If Trump leads on Election Day with a large backlog of absentee and mail-in ballots, stocks could see more volatility until more results come in,” the BofA analysts said.


If the count is close, with ballots in question and state recounts, investors may respond as they did during 2000, when the S&P 500 sold off 5 per cent before the Supreme Court called the election for George W. Bush on December 12.

Declines will be sharper if either side refuses to accept the results, with the economy set for an “uncertainty shock” as confidence stumbles — with businesses delaying hiring and investments, while households turn to precautionary saving — and as doubts about fiscal stimulus mount.

Here’s what BofA expects for stocks with in two election outcomes:

  • a Republican sweep would initially be positive (with little change to a gain of 5 per cent), with beneficiaries including real estate, dividend yielding stocks, restaurants and services firms; while multinationals would lag.
  • a Democratic sweep would be initially neutral (with a drop of as much as 5 per cent to a gain of as much as 5 per cent), and longer term positive, with cyclicals and small caps benefiting while energy and luxury goods may be hurt.

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Source: Thanks smh.com