U.S. President Donald Trump points at the crowd as he enters his first re-election campaign rally in several months in the midst of the coronavirus disease (COVID-19) outbreak, at the BOK Center in Tulsa, Oklahoma, U.S., June 20, 2020
  • UBS advised clients in a Monday note on how to prepare for a contested election result come November.
  • Precedents set by the 2000 US presidential election suggest stocks will tumble over the first few days amid a wave of volatility, Thomas McLoughlin, head of Americas fixed income at UBS, said.
  • Safe-haven assets including gold and Treasurys will gain over the same period as investors park cash in stabler positions, he added.
  • Still, the market's reaction will largely fade over the following week. Investors shouldn't brace for a long-term shakeup, the bank said.
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Stock market strategists have long advised customers on how to invest before a US presidential election. UBS is now preparing clients for a contested result.

President Donald Trump faces numerous headwinds in his bid for a second term. He's consistently polled below presumptive Democratic presidential nominee Joe Biden. The Trump administration's approval rating has steadily fallen as the coronavirus pandemic continues to roil the country. Even Trump's favorite bragging point — the US economy — has tanked and remains mired in recession.

That combination of hurdles may lead the president to take a variety of actions to contest a Biden victory, Thomas McLoughlin, head of Americas fixed income at UBS, said Monday. If election day passes without a clear winner, investors should brace for strong market volatility and pivot to stabler assets, the bank added.

"To the extent that President Trump makes up ground and the election is close, the prospects for a delay in an announcement of the winner becomes a real possibility," McLoughlin wrote. 

He continued: "Markets abhor uncertainty, so it is reasonable to expect safe havens such as gold and US government securities to offer some refuge."

The best precedent for judging how markets may react is the 2000 presidential election, according to the bank. The related recount and Supreme Court decision delayed Vice President Al Gore's concession for six weeks after election day.

The stock market initially slipped on the unprecedented result. The Dow Jones industrial average tumbled more than 5% in the first two weeks after election day. Gold prices leaped as investors piled into safe-haven assets.

Academic research done in the wake of the 2000 election suggests stock market volatility linked to an inconclusive election will be concentrated in the first four days following the contested outcome, UBS said.

A delayed decision won't rattle markets for long, McLoughlin added. Volatility "should dissipate over time" after its initial spike. Save havens' potential boost will similarly fade once reactions calm and investors exit short-term strategies, the strategist said. 

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