The US presidential election may not turn out to be a done deal on Nov. 3, but Wall Street thinks the turmoil will be short lived.
While traders have upped their bets on a contested election since US president Donald Trump dialed up his skepticism of mail-in ballots and refused to commit to a peaceful transfer of power, derivatives linked to volatility, or swings in US stock prices, show traders expect the election will be resolved by Inauguration Day on Jan. 20.
Futures tied to the VIX volatility index, sometimes called the “fear gauge,” allow investors to hedge risks or to speculate on the likelihood of an event’s outcome.
Other derivatives markets, like options linked to the exchange rate between the US dollar and the Japanese yen, also show traders are braced for a delayed result, according to Olivier Korber, a strategist at Société Générale. Those prices show traders are poised for volatility in mid-November that’s about four times higher than usual, but quickly ebbs.
“The pricing is really concentrated around the event,” Korber said. “The market is more likely expecting a short-lived reaction than being afraid of a game-changer.”
The vote is likely to be close in some key states, potentially leading to disputes, and mail-in ballot counts could delay the results. But for all of Trump’s bluster about a rigged election, and speculation he won’t concede if voters deny him a second term, economists and traders think the US’s institutions are strong enough to prevail.
“We expect the scheduled Jan. 20 inauguration to be uneventful,” said Tom Torgerson, co-head of the sovereigns ratings group at DBRS Morningstar. “Even if the November election results are contested, there are institutional mechanisms in place to resolve those disputes before inauguration. Our expectation is that the US Constitution will be upheld.”