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“We are in for a very uncertain several days and weeks ahead,” notes Raymond James Washington Policy Analyst Ed Mills.

President Trump has exceeded expectations and polling predictions, winning a number of the core states critical to his reelection. However, as of early Wednesday morning, former Vice President Biden was the only candidate to flip an Electoral College vote from 2016 by winning Arizona (the Trump campaign contests that Biden has won) and Nebraska’s 2nd Congressional district.

The winner of two of the following – Michigan, Pennsylvania and Wisconsin – likely wins the presidency. The count in these key final states could take several days, if not weeks, to decide, and the president declared he will take this to the Supreme Court.

Republicans appear to have the advantage in retaining their Senate majority, but that too could take days or weeks to finalize – possible even until the January Georgia runoff election. The House of Representatives, as expected, will retain a Democratic majority.

Expect a volatile period for the markets, especially as prospects for a near-term lame duck fiscal relief package will be diminished.

Contested election

The current election result is the scenario we believe has the greatest market risk, especially if the final count in multiple states could lead to a recount or court battle with the winner of the Electoral College at stake. President Trump has already vowed to seek Supreme Court intervention and has raised the concern of fraud. We are in for a very uncertain several days and weeks ahead.

For financial markets, a contested election would probably be a risk-off event. The only historical comparison is Bush/Gore in 2000, during which the equity market traded off ~5% and then recovered when the election was settled. We would expect a steeper selloff this time.

Trump outperforms

Once again, President Trump outperformed expectations and polling averages. President Trump’s strength came with increased turnout among his base, and he made significant inroads among Hispanic voters, especially in Florida. We had long viewed Trump’s electoral strategy as convincing supporters who did not vote in 2016 to vote in 2020. In a quick scan of the outcome, we would highlight that President Trump added more than 1,000,000 votes to his 2016 outcome – an impressive feat. The path forward for President Trump will require him to win two of the following three – Michigan, Pennsylvania and Wisconsin.

Biden confident

In a speech to supporters, Biden exuded confidence in his position in the race, especially in his position in Pennsylvania, but also highlighted the campaign’s standing in Michigan and Wisconsin. Biden stated that they are also closely watching Georgia, which has swung back and forth throughout the vote count. This clearly was not the blue wave that the campaign was hoping for, but they are attempting to establish an early impression of a lead.

Senate races

Toss-up races often break as a group toward one party or the other. Republicans had a much better election night than expected and are in a decent position to maintain their Senate majority. As expected, Arizona and Colorado flipped toward Democrats, Alabama flipped toward Republicans. The Georgia special election is headed toward a run-off on January 5, 2021.

House races

Democrats will retain their majority in the House of Representatives, but the final tally will take several days to finalize. While this will be welcomed news for Democrats, it was not the wide expansion of their majority that they had hoped for heading into the election.

Market implications: split government

This outcome would mean a slower recovery, the lowest chance for fiscal stimulus, no tax rate increase but likely any regulatory negatives. Probably positive on relative basis for defensive and interest-rate-sensitive sectors (staples, utilities, healthcare) and negative for recent “pro-cyclical” trade (industrials, materials, financials, small/mid-cap stocks).

Market implications: status quo

This outcome would be the most positive for stocks broadly and would likely mean more fiscal stimulus and a potentially lower income tax rate. Most positive for financials and energy due to the likelihood of less regulation. Technology would be more questionable given China relationship risk; large caps would likely outperform.

Market implications: Democratic sweep

This outcome would likely mean a steeper yield curve and higher taxes for smaller caps and cyclicals. Essentially, investors would likely move out of bonds and into equities, and small/mid caps are most positively correlated to higher rates and inflation expectations, therefore likely benefiting. This outcome would be most beneficial to those sectors most positively impacted by a steep yield curve or fiscal spending, such as industrials, materials and financials.

This information is being provided for information purposes only and is not a complete description, nor is it a recommendation. Expressions of opinion are as of this date and are subject to change without notice. Keep in mind that there is no assurance that any strategy will ultimately be successful or profitable nor protect against a loss.

Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value. ©2020 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. ©2020 Raymond James Financial Services, Inc., member FINRA/SIPC.