A Wall Street expert says no one expects to know the winner on election night — and explains why that's not the 'best outcome' for markets

• No one expects to know who won the presidential battle on election night — and that may not be the "best outcome" for markets, a Wall Street expert said.
• The stock market's fear gauge, or the VIX index, is showing heightened concerned about how long it might take before results are known, Charles Schwab's Randy Frederick told Business Insider.
• Potential for a contested election is another element of investor anxiety.
• "If it drags on for several weeks, if it ends up being a relatively close election, that could cause a lot of havoc in the markets," Frederick said.
• Visit Business Insider's homepage for more stories.

Nobody expects to know who the winner is on US election night and that isn't the "best outcome" for markets, a Wall Street expert said on Thursday.

"Should that happen, I think the markets would rally pretty sharply regardless of the outcome," Randy Frederick, a vice president of trading and derivatives at Charles Schwab, told Business Insider.

He explained that generally volatility peaks before the occurrence of a critical calendar event — like the election — and then immediately falls back just as sharply.

But the fact that VIX futures are showing a larger spike in November, which covers the four weeks after the election, than in October shows heightened concern about how long it might take after the election before the results are known.

"It's highly unusual for there to be a visible expectation of higher volatility after what would typically be considered a critical event such as the election," Frederick said.

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Potential for a contested election is another element of investor anxiety. President Donald Trump has explicitly refused to commit to a peaceful transition of power if he loses in November. He expects the election to "end up in the Supreme Court."

"If it drags on for several weeks, if it ends up being a relatively close election, that could cause a lot of havoc in the markets," Frederick said. "Frankly, I think the markets would potentially sell off and we'd probably see a pretty sizeable spike in volatility."

The best outcome for markets, he said, would be to find out who won "very quickly."

The current scenario can be compared to the year 2000 when the presidential election results between George Bush and Al Gore were contested.

Frederick pointed out that back then, markets sold off immediately after election day. After leveling off for about a week, the finalized results were declared on December 12, and markets sold off for a second time.

"That's probably the closest comparison we can make and there's a very good possibility that we see that again," he said.

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Right now, the only sector that Charles Schwab considers as a strong buy are financials. "That has to do primarily with the fact that it has been a relative underperformer when compared to others like consumer discretionary and technology," Frederick said. As a result of that, the sector is trading at more reasonable valuations.

Bank stocks as a sector have lost about 22% this year, compared with a 25% gain in technology stocks, and a 17% rise in consumer discretionary stocks, such as Nike, Amazon and Target.

At the same time, he said the bull market will continue with other leading sectors like tech doing fairly well.

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President Trump tested positive for the coronavirus thirty-two days before the election, throwing uncertainty over the next presidential debates. This jeopardizes his ability to campaign.

According to the FiveThirtyEight election forecast, the president's chances of winning are slim. The model suggests that Democratic nominee, Joe Biden, has about an 80% chance of winning given his position in the polls and the time that remains.

"Markets appear to be increasingly pricing Joe Biden in as the favorite," said Jeff Buchbinder, an equity strategist for LPL Financial. "But Trump could gain support from a quick recovery as UK Prime Minister Boris Johnson did during his battle with COVID-19."

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