Goldman Says Markets Overestimating Election Result Delay Risk

© Reuters.

(Bloomberg) — Traders need to reduce expectations that a delayed U.S. election result could upend markets, according to Goldman Sachs Group Inc (NYSE:).

While a delayed outcome is a “tail risk,” a combination of early results, voter turnout, county-level data and the high correlation of polling errors across states suggests investors will have enough information on election night to determine the likely victor, wrote economists Michael Cahill and Alec Phillips in a note Thursday. A number of states — including some key battlegrounds — allow votes to be processed and counted well before election day, they noted.

“It seems fairly likely that there should be enough information on election night from states that will report results quickly for the market to be able to gauge the likely winner,” the pair wrote. “In other words, the S&P can trade the likely outcome, even if the AP does not call the race.”

With the attention of many investors turning toward November’s elections as a source of risk, the cost of hedging against a contested or delayed result is getting ever more pricey. One measure in the equity market shows the most-expensive event risk on record. Among traders’ biggest fears — an expected record number of mail-in ballots that may not be counted for days.

Goldman says the high level of uncertainty priced into currency options may be due to “muscle memory” of outsized moves in some crosses from the 2016 vote. The uncertain growth outlook amid the Covid-19 pandemic means this election should be less decisive for market direction, they said.

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“While we recognize that an especially uncertain election outcome could have a significant negative impact on risk sentiment, we think this outcome is less likely than current market pricing — and client conversations — seem to imply,” the Goldman team concluded.

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