JPMorgan says US election odds are narrowing, making a contested result that could hamper stimulus and hurt stocks more likely

• The Democratic presidential nominee Joe Biden's shrinking lead in betting markets suggests a contested election is becoming more likely, JPMorgan strategists said Tuesday.
• A higher chance of a contested or close election would slam the bank's expectations for stimulus and "likely put some downward pressure on risk markets for the near term," the team wrote in a note to clients.
• A close result could also yield a split Congress and prolong the months-long stimulus stalemate.
• Long-term strategies should allocate 40% of their portfolios to stocks, the team added, as upside for equities depends on central-bank asset purchases.
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Markets might be too quick to price in a Joe Biden presidency, JPMorgan strategists said Tuesday.

Biden, the Democratic presidential nominee, has maintained a steady lead in polls in recent weeks, prompting many firms to adjust expectations for 2021 stimulus, tax policy, and congressional makeup. But betting markets are reversing course and pointing to a narrowing lead for the former vice president, JPMorgan said.

The shrinking gap suggests the odds of a contested election are increasing, as President Donald Trump has already indicated he could avoid conceding the race if margins are small in key states.

A higher chance of a contested result would cut into hopes for new stimulus and "likely put some downward pressure on risk markets for the near term," the team led by Nikolaos Panigirtzoglou wrote in a note to clients. JPMorgan's tactical stock-positioning gauges back up those concerns and signal some near-term vulnerability.

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Many have already pushed back projections for new fiscal support. House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin remain locked in negotiations, aiming to reach a stimulus compromise before the end of the week and pass a bill before Election Day. But Senate Republicans have backed their own much smaller proposal, setting each party up to block the other's measures.

The stalemate led many strategists to look ahead to Election Day. Wall Street largely agrees that a Democratic sweep of the White House and the Senate would create the path of least resistance for a large stimulus deal. A divided government would likely prolong the legislative deadlock and yield a smaller bill.

Biden's contracting lead suggests the election, contested or not, is more likely to result in a split Congress, JPMorgan said. Such an outcome would hamper the value trade, the bank's strategists added, as more cyclical sectors wouldn't enjoy the stimulus boost some expected.

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While stocks might face some vulnerability in the short term, the team recommended a roughly 40% equity allocation for longer-term strategies. Upside in the stock market depends more on debt and liquidity creation than on fiscal stimulus, the strategists said. In turn, investors should pay more attention to the Federal Reserve's asset-purchase plans for market insight, according to the bank.

Another relief bill could aid stocks, but only to the extent that it widens investor concentration to include cyclical sectors and value names, the team added.

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