• Trump suggested he could not guarantee a peaceful transfer of power should he lose the election
  • Trump suggested the election may eventually have to be decided by the Supreme Court
  • A disputed election result and a long drawn out aftermath would also rattle markets

With less than 40 days till the presidential election, some voices on Wall Street are worried about the market impact of a contentious battle between Republican incumbent Donald Trump and Democratic challenger Joe Biden.

Fears intensified on Wednesday when Trump suggested he could not guarantee a peaceful transfer of power should he lose the election.

Trump suggested the election could become mired in fraud and may eventually have to be decided by the Supreme Court.

“Well, we’re going to have to see what happens,” he said. “I’ve been complaining very strongly about the [mail-in] ballots. … The ballots are out of control. Get rid of the ballots and … we’ll have a very peaceful [transition].”

Another worry – given the uncertainties of holding a national poll during a pandemic, including a rise in mail-in voting – is the possibility of no clear-cut winner on election night.

“We’re kind of preparing for Armageddon on Nov. 3,” a senior vice president at a major quantitative trading firm told Vox. “If it’s close, there’s a decent chance that, like, who… knows? Are markets going to be down 20% on Wednesday [the day after the election]?”

JPMorgan strategist John Normand suggested that a concrete result may not emerge on election night in a note he wrote to clients.

“A contested election has become the baseline," he wrote. "Given the long-term rise in alternative voting methods over past 30 years; likely surge in postal voting this year due to COVID-19; and Trump’s allegations that postal voting is more susceptible to fraud.”

Strategists at Goldman Sachs wrote Wednesday that “there appears to be a significant bifurcation in voting method preferences between Democrats and Republicans, with a significant majority of Democrats expressing an interest in voting by mail and a majority of Republicans preferring to vote in person.”

Goldman Sachs added: “This could lead to the appearance of a Trump lead on election day, but a potentially significant portion of the Biden vote still to be counted in the mail-in ballots. In a close election, such an outcome could result in claims/counterclaims of victory and/or litigation, and result in significant market volatility over an extended period.”

A disputed election result and a long drawn out aftermath – as what happened in late 2000 in the race between George W. Bush and Al Gore which led to a recount in Florida and a Supreme Court ruling – would also rattle markets.

Normand pointed out that after the 2000 election, the S&P 500 index dropped 7% from election night until Gore conceded in mid-December.

Isaac Boltansky, director of policy research at Compass Point Research & Trading, told Vox: “The No. 1 worry that I’ve heard over the last few weeks is not knowing who will be the winner.”

At the very least, investors are preparing themselves for increased market volatility.

While many investors would likely favor Republican Trump’s stances on taxes and deregulation, some would prefer Biden’s approach to immigration and renewable energy.

“Wall Street sees advantages and disadvantages to both candidates,” said Kristina Hooper, chief global market strategist at Invesco. “It’s not as clear cut as you might normally see in an election.”

Ian Bremmer, president and founder of Eurasia Group, a political risk research and consulting firm, told Yahoo Finance the U.S. is “incredibly divided” and on the brink of an election “that is likely to be perceived as illegitimate, irrespective of the outcome, unless it's a landslide.”

Overseas traders are also watching the U.S. election.

Strategists at France’s Societe Generale wrote in a note on Tuesday: “The outcome of the November U.S. election is more uncertain than ever, which is counterintuitive given that Joe Biden has a sustained lead in the polls.”

The Paris-based investment bank added: “The possibility that the winners of the election will not be known on Election Day itself has started to be reflected in the volatility [in the] market, and the prospect of a contested outcome poses the highest risk to our broadly short-term constructive outlook on risky assets [equities].”

Further complicating the U.S. election scenario is the recent death of Supreme Court Justice Ruth Bader Ginsburg. Trump and top Republicans want to nominate a conservative judge as a successor to Ginsburg as quickly as possible, but Democrats will try to block any such moves until after the election.

“The Supreme Court nomination can become another driver of the election and can energize both voter bases. It can also cause more uncertainty in the event of a contested election,” TD Securities said earlier this week.

“There could be longer-term issues due to the replacement as well; the filibuster could be repealed and there may be more support for ‘packing’ the Supreme Court,” a reference to a proposal by Democrats to increase the size of the court to at least 12 seats.

Bremmer of Eurasia pointed out that the current political turmoil is worse than what occurred during the 2000 election, given the unprecedented pandemic and its economic devastation.

“[This is] an environment where you've got a pandemic, where you’ve got a major economic contraction, with a lot of geopolitical instability,” Bremmer said. “The ability for any additional [risks] to hit when we don't have a functioning government, when we don't have agreement on who’s supposed to be in charge, makes it much more dangerous.”

Meanwhile, politicians from both sides of the aisle condemned Trump’s comments about possibly not accepting an election loss.

“President Trump: You are not a dictator, and America will not permit you to be one,” Senate Minority Leader Chuck Schumer, D.-N.Y., tweeted.

“Fundamental to democracy is the peaceful transition of power,” Sen. Mitt Romney, R.-Utah, said in a tweet. “Any suggestion that a president might not respect this Constitutional guarantee is both unthinkable and unacceptable.”