Tight US vote to be ‘very strong’ negative for stocks in near term: analysts

A close or contested election result could be a “very strong negative” for US stocks in the near term, analysts warn.

A Donald Trump victory would still come as a shock, despite tightening polls, say analysts. Pic: AP

US analysts have warned that a tight presidential election race could continue to weigh heavily on stocks over the near term, particularly if a close final vote goes to a recount or court judgment to determine the winner.

Research from UBS questioned whether an outcome would be conclusively decided by the morning after next week’s vote, and whether the losing candidate would “honour the tradition of reconciliation” with their opponent, a reference to Republican hopeful Donald Trump’s refusal in the third presidential debate to commit to accepting the election outcome.

UBS pointed to the 2000 election, in which a tight race was settled in favour of George W. Bush only after a mandatory recount in Florida and a close Supreme Court decision.

“Such an outcome in 2016 would likely be a very strong negative for stocks in the near term, particularly since the Supreme Court is missing a ninth judge,” UBS analysts led by Julian Emanuel said in a research note.

“Such a divisive election, regardless of outcome, has tended to mean markets remain on the defensive in November and in the month(s) ahead.

“The history of contentious elections with viable Third Party candidates is such that the markets are soggy into and beyond the election.”

But the bank suggested its clients should view election-related volatility as a possible buying opportunity, backing the health of the US economy beyond the election decision.

“Politics matters in the short term, but the economy and earnings matter in the long term. ‘Only recessions kill the bull’, and 2017 looks to be recession free.”

Democratic presidential hopeful Hillary Clinton’s lead in the polls has narrowed in recent days since FBI director James Comey announced the review of new emails related to its investigation of her use of a private server while she was secretary of state.

Across an average of six polls tracked by Real Clear Politics, Mrs Clinton has a lead of 1.7 percentage points over Mr Trump, down from 5.6 percentage points on Thursday last week, the day before the FBI announcement.

Not so certain: Hillary Clinton.

Markets had been pricing in a victory for Mrs Clinton in the White House race, but have started to adjust to take into account the possibility of a close result or a clear win for Mr Trump. The S & P500 fell 0.7 per cent in New York trade overnight and is off 1.7 per cent over the past four sessions.

As investors seek safe haven assets amid the uncertainty, spot gold reached a one-month high of $US1307.76.

Research house Capital Economics said overnight that the presidential election race had become “too close to call” and could result in a near-tied result that one or both candidates would aggressively dispute, which would be a negative for equities.

“Under those circumstances, the infamous 2000 election suggests that the uncertainty could persist for at least a month and could weigh heavily on the stock market during that time,” Capital Economics’ US economist Andrew Hunter wrote in a research note.

“A Trump victory next week would still come as a shock given that, even after the FBI’s intervention, Clinton maintains a modest lead in the polls.

“In the event of a very narrow Clinton win, it is all but guaranteed that Trump would aggressively dispute the election via the courts. Civil disorder is also possible.”

The day after the 2000 election, when markets opened without a clear result, the S & P500 fell by 1.6 per cent, going on to lose almost 5 per cent by the end of the week, Capital Economics said.

“While Al Gore conceded very quickly following the court’s ruling in 2000, given the antipathy between them, Trump or Clinton might not. That would extend the uncertainty.

“The one near-certainty in this kind of scenario is that the Fed would shelve plans to raise rates at its mid-December meeting.”

Morgan Stanley analysts warned that the vote’s impact on equities could vary depending on the results of the races for the Senate and House of Representatives.

A Clinton presidency, Democratic Senate and Republican House — Morgan Stanley’s most likely scenario — could be negative for healthcare and pharmaceutical stocks, given greater regulation of drug prices. But it could be positive for financials, allowing “regulatory relief” for small banks.

Financials would fare worse under either a Democratic or Republican sweep of all three races, Morgan Stanley said. A Democratic sweep — the least likely scenario — could lead to a push for a stronger regulatory regime, while a Republican sweep could lead to a review or “audit” of the Federal Reserve.

“(The FBI revelation) could further tighten an already tightening race in the coming days, but we think Clinton is likely to maintain a polling lead going into election day,” wrote Morgan Stanley analysts led by Michael Zezas.

“Hence, divided government outcomes remain most likely, limiting potential policy actions to incremental tax changes and infrastructure spending. However, a tighter race risks markets starting to reflect the early policy path of a Trump presidency.”

Yesterday Westpac strategists said a Trump presidency “has larger long-term global ramifications than Brexit”.