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Investors are finally getting nervous about the election

After wrestling with a multitude of thorny issues this year, investors finally are getting around to thinking about the presidential election. They may not get good news for the markets.

Surveys from multiple Wall Street firms show growing concern over how the race between presumptive nominees Hillary Clinton and Donald Trump will play out. By large numbers, Morgan Stanley clients believe the market is far too apathetic about the contest. UBS says its high net worth customers are hoarding cash, while Credit Suisse clients view the election as having "broad-based" market implications.

Up until now, investors have been focused primarily on three issues: global economic weakness, Britain's vote to leave the European Union and unpredictable Fed policy in which the U.S. central bank has backed away from its stated intentions to raise rates. However, the focus toward politics is growing.

Morgan Stanley specifically reports that 70 percent of 650 investors it surveyed say markets are "too sanguine about election risk," believing that the outcome could alter the landscape substantially.

The firm's analysts, though, aren't buying it, despite the contentious tone and a raft of proposals from both candidates that would, if enacted, cause significant shifts in fiscal policy.

Instead, Morgan Stanley's analysts envision the most likely scenario being "policy incrementalism," where either candidate will be hard-pressed to push major reforms through a divided Congress.

Wall Street NYSE
Scott Eells | Bloomberg | Getty Images

"Not all election consequences are transformational, and current evidence suggests the U.S. elections in November won't yield outcomes that substantially change market fundamentals in the near term," the firm wrote in a 51-page analysis. "This may seem a surprising statement given the campaign season has heretofore featured a mix of vitriol and policy proposals that likely feel radical to investors."

As reflected in multiple surveys and prediction markets, Morgan Stanley says its clients expect Clinton to emerge victorious.

Taking that outcome a step further, Morgan said the most likely outcome is that the Democrat presides over a divided Congress, with the Republicans holding the House but losing the Senate. The next most likely outcome listed is Clinton winning, with the GOP holding Congress, while a Republican sweep is third most likely. Trump winning and presiding over a Democratic Congress is the least likely of four scenarios Morgan Stanley considers possible.

Weighing the respective possibilities, the firm sees little chance of meaningful change in Washington.

"Fiscal stimulus, for example, may pick up modestly given bipartisan support for infrastructure spending, but, absent a recession to motivate lawmakers, a stimulus that is meaningful to the economic outlook is unlikely given the difficulties of reaching agreement on either tax cuts or spending increases in a divided government," the report said.

That means more of the same — "sluggish" economic growth, a Fed in no hurry to boost rates, and what could be a tricky investment landscape.

The only scenario where substantial change is more likely is if Trump should win. The Republican has proposed sweeping changes to trade and immigration policies, and his fiscal stimulus plans that he says will shock growth also are projected by most economists to add to the nation's debt and deficit.

"Substantial hurdles to making policy changes would remain, but this scenario holds the greatest possibility for near term, transformational policy change," Morgan Stanley said. "The uncertainty created by that dynamic could amplify market anxiety."

While Wall Street continues to expect a Clinton victory, the polling is close. The Real Clear Politics average gives Clinton a 4 percentage point edge, even when including third-party candidates. However, a Quinnipiac poll this week gives Trump the edge in Florida, Pennsylvania and Ohio — three swing states critical to a Trump win.

Wall Street is putting its money where its mouth is. The securities and investment sector has contributed $32.5 million to Clinton's campaign, while giving just $63,559 to Trump, according to nonpartisan political finance site Open Secrets.

Credit Suisse analysts said in a report for clients that it considers the election "a potential source of stock market volatility in the second half given wide-ranging interest in the event among our analysts amid uncertainty over the candidates' policy priorities."

A previous Credit Suisse survey found that 78 percent of investors believed Clinton would win, and recent conversations indicate that still is the case. However, evaluating the market implications is difficult because candidate priorities "could shift" during the general election campaign, when candidates typically alter the rhetoric they used to placate the base during their primary contests.

Speaking in more general terms and addressing near-term concerns, Credit Suisse notes that election years are generally good for stocks, with S&P 500 returns "meaningfully above trend." In sector terms, consumer discretionary spending usually lags heading into elections and outperforms afterward, while utilities do just the opposite.

Elsewhere on Wall Street, UBS reports that its deep-pocketed clients are nervous. Wealthy investors are holding record cash balances due to election fears, even though they are confident about the economy. Some 84 percent believe that the election will impact their finances, according to Reuters.