A heated U.S. presidential race has investors bracing for an unclear or disputed election result that could put a damper on this year's stock market gains.

With less than a month to go until the election, polls and prediction markets show a near-neck race between Democrat Harris and Republican Trump. In a Reuters/Ipsos poll released on Tuesday, Harris narrowly leads Trump by 46% to 43%, a closer result than the same poll showed a few weeks ago.

Investors expect any close election results this year could also be contested, given Trump's efforts to overturn his loss to Biden in 2020. The balance of power in Congress is also at stake, and some potentially close races could add to uncertainty.

“This is going to be a close election. It makes sense that there’s a higher-than-average chance of some type of dispute,” said Walter Todd, chief investment officer at Greenwood Capital in New York, who expects stocks to sell off if the results remain in doubt for more than a few days.

“Markets don’t like uncertainty, and they certainly don’t like us not knowing 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 the stock market. Robust U.S. economic growth has helped the S&P 500 reach new highs, with the benchmark index up 21% so far this year and on track for its second straight year of double-digit gains.

That’s not to say investors aren’t watching the election. The CBOE Volatility Index, a gauge of market expectations for S&P 500 volatility over the next 30 days, has risen about 6 points from its September low to 20.9, a level typically associated with moderate to high expectations for market turmoil. Investors say the rise in the index is partly due to the looming election.

Options markets also reflect heightened concerns about tail risks, or market shocks caused by unlikely but high-impact events. The Nations TailDex Index (TDEX) recently hit its highest level in a month.

Michael Purves, CEO of Tallbacken Capital Advisors, believes that investors are too focused on the days before and after the U.S. election, and a disputed election could disrupt markets in the weeks after November 5.

“It’s not so much the outcome of the election that people are worried about, it’s the potential risk after the election that a majority of people believe the election was invalid,” he said. “To me that’s a real risk ... that the stock market could sell off at that point.”

There is little recent precedent for elections being challenged.

Markets were largely unfazed by Trump's attempts to overturn the results of the 2020 election. Although Biden was not officially declared the winner until the weekend of Election Day, U.S. stocks rebounded the rest of the week after Election Day.

But investors may be less optimistic this time around, especially if either party challenges a close result and wins over other lawmakers and election officials in swing states.

Trump and his allies have been suggesting for months that they would challenge the lost results, repeatedly claiming they were concerned that large numbers of noncitizens would vote, even though state reviews showed the practice was rare.

The most obvious disputed election in modern U.S. history dates back to the end of 2000, when the contest between Bush and Gore remained inconclusive for more than a month as Gore's campaign challenged the results in Florida. U.S. stocks fell sharply as a result.

The S&P 500 fell 5% from Election Day 2000 until Gore conceded in mid-December, as unease about technology stocks and the broader economy also weighed on sentiment. The index fell 7.6% overall between November and December 2000.

Such volatility could cloud the outlook for stocks, which tend to perform strongly in election years. Since 1952, the S&P 500 has risen an average of 3.3% in the final two months of a presidential election year, with a 78% chance of gaining, according to Keith Lerner, co-chief investment officer at Truist Advisory Services.

Purves of Tallbacken Capital recommends that investors hedge against potential election-related volatility with put option contracts, which increase in value when stocks fall.

Kurt Reiman, head of Americas fixed income at UBS Wealth Management and co-head of ElectionWatch, remains generally bullish on stocks but said investors should consider popular safe-haven assets such as utilities and gold to buffer portfolios against risk in a close or contested election.

Stephanie Aliaga, global market strategist at JPMorgan Asset Management, said any volatility caused by a potentially contentious election is likely to ease once uncertainty fades.

“Elections create uncertainty, but the election results ultimately reduce that uncertainty, and at the end of the day, markets do tend to rally after elections because the uncertainty is removed,” she said.

The article is forwarded from: Jinshi Data