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Wall Street traders suddenly look less worried about a contested US election

Reuters/Brian Snyder/File Photo
Moving further apart.
By John Detrixhe
Published Last updated

Wall Street traders think a contested US presidential election is becoming less likely, as polls suggest Democratic candidate Joe Biden is increasing his lead over president Donald Trump.

Derivatives linked to volatility had jumped in recent weeks, after Trump claimed mail-in ballots were subject to fraud and refused to commit to a peaceful transfer of power. These futures contracts are tied to the VIX volatility index, sometimes called the “fear gauge,” and they allow traders to speculate on whether stock market price swings will increase or decrease.

Contracts that expire after election day on Nov. 3 showed the biggest increase, implying a bet that the election outcome might not be settled for weeks.

But a lot has happened lately. There are signs that voters were turned off by Trump’s performance in the first presidential debate, in which he sought to bulldoze his opponent by talking over him. Then came the outbreak of Covid-19 cases at the White House. The Biden campaign, meanwhile, got through yesterday’s vice presidential debate without self-inflicted wounds.

“There’s been some repricing post the first and vice-president debate,” Alberto Gallo, head of macro strategies at asset management company Algebris Investments, said of the decline in volatility derivatives. Trump’s “not-so-great performance” has also had an impact, Gallo added.

An average of election polls compiled by FiveThirtyEight signal Biden’s lead has increased to 9.8 percentage points, up from 7.1 percentage points on Sept. 29. A poll by the New York Times and Siena College suggested that voters in Florida and Pennsylvania, two important swing states for the November election, disapproved of Trump’s bullying tone in the debate. A Biden victory by a larger margin could reduce the likelihood of a contested election, because there would be less to argue about in court.

The Nov. 3 vote is likely to be close in some key states, potentially leading to disputes, while mail-in ballot counts could delay the results. And traders are probably haunted by the memory of the 2016 presidential election, in which many investors were caught off guard by Trump’s victory.

But this time around, some analysts think traders have overcorrected when it comes to the risk of a contested vote. “Although we think that these probabilities now look too high, a contested election outcome is still a real risk and one that could have significant—albeit perhaps temporary—asset market impacts,” analysts at Goldman Sachs wrote in a note published Oct. 6. “Market pressure from an election delay should, in most circumstances, ultimately be a temporary phenomenon.”

This story has been corrected in the fifth paragraph to show that Algebris Investments is an asset manager, not a hedge fund. 

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