Wall Street is bracing for a inconclusive US election result, JPMorgan warns

• JPMorgan said Tuesday the US election will cause volatility for markets even beyond results day.
• Strategists led by Joshua Younger said in a Tuesday note that volatility, a measure of investor nervousness, on some derivatives that expire around the election day is six times higher than normal.
• During the 2008 and 2012 elections, this volatility was only two times more than normal and three times more in the case of 2016 election.
• Strategists said: "The tendency of the market to project, based on what information is available at the time can, under the right circumstances, lead to significant excess volatility in the weeks following Election Day, particularly in rates and equities."
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Markets have just over 60 days until Americans choose their new president, but the wave of uncertainty will likely remain well past November, due to the high probability of an inconclusive result, JPMorgan said Tuesday.

In a note, strategists led by Joshua Younger, said: "The tendency of the market to project based on what information is available at the time can, under the right circumstances, lead to significant excess volatility in the weeks following Election Day, particularly in rates and equities."

The bank said markets are focusing on 2016 trends, when the opinion polls and the actual outcome of the election diverged, and pricing high levels of risk, particularly in the options market.

The options market shows that implied volatility — how much the underlying asset is likely to move — on instruments that expire roughly around the election is six times higher than what it would normally be, compared with twice as high in the 2008 and 2012 elections, and compared with three times as high in the case of 2016's election between Donald Trump and Hillary Clinton that delivered such a surprise outcome.

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Corporate bonds are also reflecting increased investor anxiety through higher risk premia, the bank said.

"Timing of election credit (volatility) is spilling over into December, adding specifically "forward pricing trends point to increasing market concerns of a delayed election result, or election volatility spilling over into December."

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But currency options are showing there is less investor anxiety than in the equity and credit markets building around the aftermath of the vote, JPMorgan said.

"While domestic equities, credit, and rates are priced consistent with elevated volatility well after Election Day,
potentially due to a delayed or contested result, the FX market is pricing quite the opposite into forward overnight vols," the bank said. "All else equal, this suggests election-related event risk is much more expensive in equities and rates options markets compared to FX, and favors overweighting the latter versus the former when buying protection."

Markets watchers have been split over whether to advocate greater preparation for uncertainty over the election outcome, or to assume volatility will remain limited around the election, as it has tended to over the past few decades.

Top strategist Lindsey Bell warned Tuesday that the VIX, Wall Street's "Fear Index", has been creeping up and cited the election outcome as a key factor that will create greater volatility in coming weeks.

But CFRA's Sam Stovall said Wednesday data going back to the 1940s shows that September at least doesn't bring the kind of wild price swings that many fear in election years.