It could be days before the next president claims victory, but Wall Street has seemingly pushed all its chips into the prospect of a clear winner.
MANHATTAN (CN) — Markets rallied ahead of any election results on Tuesday but the mantra on Wall Street — that any volatility is bad volatility — could take shape if there is no clear winner in the hotly contested presidential election.
The volatility index, known colloquially as Wall Street’s fear index, began spiking up again at the end of October but is still well below the huge increases seen in late March and early April. The VIX has dropped only slightly in the last few days, a sign that traders are still somewhat nervous about a protracted presidential ballot battle.
“I suspect it will stay elevated for a while, especially if the vote count drags on and a clear winner is not declared by Wednesday at the latest,” said Michael Pagano, a finance professor at Villanova University.
In the short term, many believe a Trump reelection would be good for the markets while a Biden victory would likely lower them. No matter who wins, however, a dragged-out, no-holds-barred election fight is expected to rattle investors.
“If the race is decided by the verdict in a single state … and the margin is close (less than 1%), then both the Biden and Trump campaigns will send lawyers in to either end or extend mandatory recounts — and that’s how we’ll get a contested election and a worst-case scenario in the near term for stocks,” wrote Tom Essaye, president of The Sevens Report.
Volatility aside, markets kicked off Election Day with sizable gains, building off Monday’s bull rush. At the opening bell, the Dow Jones Industrial Average gained more than 300 points, at one point in the afternoon gaining more than 700 points. By the time trading ended for the day, however, the Dow settled at a 552-point, or 2%, increase.
The Nasdaq also posted sizeable early gains to settle at a 1.8% increase, exactly how the S&P 500 finished after a similar trajectory.
Similar gains in markets abroad prefaced the day’s rally. Major indexes in China, Australia, and South Korea each hit nearly 2%, while Japan’s Nikkei finished the day’s trading up 1.4%. Stocks in Europe did even better, with the pan-European Stoxx 600 gaining 2.3% for the day, and markets in Germany and France posting even higher gains.
“The upwards moves that were witnessed yesterday don’t appear to have been rooted in any particular fundamental story,” wrote David Madden, a market analyst at CMC Markets. “In a way, the bullish moves felt like a relief rally, as stocks slumped last week on the planned tighter restrictions for France and Germany, that will come into effect in this month, and now that November has arrived, there was a bounce back.”
Many investors seem to be banking on another Blue Wave, in which Democrats take the Senate.
Analysts at Goldman Sachs say the presidential election points strongly toward a Biden win, with Trump needing to win key Sun Belt states, as well as Pennsylvania, Michigan and Wisconsin. But one investor’s note from the bank’s chief economist, Jan Hatzius, said the Senate race is less clear.
“We have argued that the Senate majority is at least as important as the presidential election for fiscal policy in 2021,” Hatzius wrote, noting a larger Senate majority could lead to the elimination of the filibuster.
Hatzius had previously said that blue wave in 2020 would improve the chances of a stimulus package of $2 trillion or more passing in January shortly after Inauguration Day. Fellow Goldman Sachs analyst Lotfi Karoui wrote last month that, if Democrats take control of the White House and both chambers of Congress, “we see more pros than cons for credit markets.”
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