Markets aren't prepared for the price swings that could follow a too-close-to-call election, Goldman says

• The stock market hasn't been pricing in sizable volatility risk with the 2024 Presidential election only months away, Goldman says.
  
• Such a tight race could mean the winner doesn't get declared for days after voting.
• That uncertainty could stir up price swings that investors aren't currently prepared for, according to the firm.

The upcoming Presidential election poses a big risk for the stock market if the winner is not decisive and the results are drawn out, according to Goldman Sachs.

The bank said in a note on Friday that investors are underpricing the risk of a too-close-to-call Presidential election, as most polls between President Joe Biden and former President Donald Trump remain incredibly close and within the margin-of-error.

Amplifying the risk of a drawn out Presidential election is the fact that both Trump and Biden have wildly different fiscal and economic agendas, which include divergent views on tax policies, government spending, and tariffs against certain countries.

Those different agendas translate into different investment strategies to be implemented by portfolio managers across Wall Street, and if the ultimate winner of the Presidential election stays undecided past the November 5 election date, it could lead to a surge in market volatility as investors wait to determine which basket of stocks to buy.

The potential for a drawn-out election in November will be determined by the margin of victory, as only a slight win in certain states could automatically trigger a recount.

"In 23 states — including the swing states of Arizona, Michigan, and Pennsylvania — provisions exist for automatic or mandatory recounts if the margin between the top two candidates is within certain parameters, typically 0.5%," Goldman Sachs' strategist David Kostin explained.

Meanwhile, 41 states permit a losing candidate to petition for a recount if he or she believes they were aggrieved on an account of fraud or mistakes in the canvass or return of votes.

Based on the 2020 election and the fact that it's the two same candidates, combined with close polls, it's not a stretch to believe that the winner of the upcoming election won't be determined on election night but will rather be a drawn-out process.

And that's the big risk for investors. It's not a matter of who wins the election that matters, but rather when they win the election that matters most, Goldman Sachs said.