A contested election could hit the stock market hard in the short term

Published Wed, Nov 4 20202:02 AM ESTUpdated Wed, Nov 4 20202:27 AM EST

(This story is for CNBC PRO subscribers only.) Election Day has come and gone without a definitive answer on who the next president of the United States will be , and with the possibility of a contested result, the market could be in for a rough ride in the short term. Bank of America recently gave three scenarios for delayed results in the election: Under a benign scenario, the result would come within a few days after a delay caused by the record number mail-in votes. In a painful scenario the numbers would be so close that disputes could arise over ballot validity, leading to recounts at the state level. Under a crisis scenario, either side could reject the results, "leading to a legislative battle and a high degree of government dysfunction." The firm said the painful scenario could result in a 5% drop for stocks, while the crisis view could result in a much steeper 20% drop for U.S. equities. Bank of America said the economic shock would stem from a drop in consumer confidence, as well as further delays for another round of stimulus measures as Covid-19 cases across the country rise. "Political uncertainty combined with uncertainty around additional stimulus could put much more pressure on stocks. Note that during the Watergate scandal, which coincided with an economic recession, the S & P 500 fell 48% from peak to trough," the firm said in a note to clients. Credit Suisse said a contested election and therefore a delay Washington's ability to pass additional fiscal stimulus would "likely result in a sharp sell-off in equities, with cyclicals and value stocks underperforming." Depending on how long the outcome is unresolved, Credit Suisse analyst Andrew Garthwaite said in an earlier note, the Fed could ultimately be forced to increase its bond-buying program and potentially take interest rates negative. Should this scenario play out, the firm recommends investors buy defensive and growth stocks. Tom Essaye, editor of the Sevens Report, noted that a contested election would be the "worst-case scenario in the near term for stocks." As Tuesday night turned into Wednesday morning, Joe Biden addressed supporters in Wilmington, Delaware. "Look, we feel good about where we are. We really do. I'm here to tell you tonight we believe we're on track to win this election," the former vice president said. "We knew because of the unprecedented early vote and the mail-in vote, it was going to take a while. We're going to have to be patient until the hard work of tallying the votes is finished." Shortly after, President Donald Trump took to Twitter, declaring that his campaign was up "BIG" and that "they are trying to STEAL the Election." His comments, which Twitter quickly flagged with a warning label as being misleading, came despite the fact that ballots across key states are still being counted. Guggenheim Partners Global CIO Scott Minerd told CNBC that while a contested election will spark turbulence and uncertainty, he still sees a path higher for stocks over the long term. "Ask yourself the question: Are you an investor or are you a speculator? If you're an investor, you tend to look through this kind of noise and say 'what will the world look like in three to six months?'" he said. "That's why I would expect over that course of time to see stock prices higher." — CNBC's Michael Bloom contributed reporting.

President Donald Trump (L) and Democratic Presidential nominee Joe Biden.

Reuters

(This story is for CNBC PRO subscribers only.)

Election Day has come and gone without a definitive answer on who the next president of the United States will be, and with the possibility of a contested result, the market could be in for a rough ride in the short term.