- Odds favor a post-election rally in US stocks, according to a Wednesday note from Fundstrat.
- Even in the scenario of a contested election, the market could still move higher as the Fed intervenes and acts as a backstop for the market, Fundstrat’s Tom Lee argued.
- “While people are sitting on the sidelines into 11/3, we see a rally taking root thereafter,” Lee said.
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Odds that US stocks rally after next week’s presidential election are high, according to a Wednesday note from Fundstrat.
The outcome of the election, whether President Trump or former Vice President Joe Biden wins, is a binary event, and stocks tend to not like binary events. The resolution of the election will remove a large overhang that investors have been focused on for months.
Investors have been hedging out election risk, and the peak of expected market movements is within the next 30 days, given that the Spot VIX reading is higher than the one-month and four-month forward VIX contracts, Fundstrat highlighted.
“This is a long-winded way of saying that with just a few days into the election, we do not believe any active manager is suddenly deciding to de-risk,” Lee said, adding that Monday’s selloff could be attributed to “stimulus capitulation.”
And even in the scenario of a drawn-out contested election, US stocks could still stage a rally, according to Fundstrat.
While there is risk that a contested election would result in a delay of another round of much needed US fiscal stimulus, "the Fed would intervene," Fundstrat said it believes.
The "Fed will intervene on a contested election -- more reason to be thinking risk-on even as we enter the final days into the election," Lee explained.
Additional easing of monetary policies is what helped turned around the COVID-19 induced market selloff in March, and it could happen again, according to Lee.
And if the election isn't contested, fiscal stimulus should move forward quickly, with the Fed still acting as a backstop.
"So, the odds heavily favor a rally post-election. In short, while people are sitting on the sidelines into 11/3 [election day], we see a rally taking root thereafter," Lee concluded.
