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Will Stock Markets Crash if the Election Results Are Contested?

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The U.S. election is underway on Tuesday, Nov. 3. A record number of voters have already voted through mail-in ballots. President Trump has indicated that he may contest the election results if Joe Biden wins. What happens in a contested election and what would it mean for stock markets? 

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While pollsters predict a victory for Democratic candidate Joe Biden, their predictions haven't always been right. President Trump’s victory in the 2016 election and the Brexit results the same year proved pollsters wrong.

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What is a contested election?

In a contested election, the losing candidate challenges the validity of the election. The last time the U.S. election results were contested was in 2000 when Al Gore contested the results. However, a sitting U.S. president hasn't contested election results before.

What happens if the election is contested?

One way that the election results can be contested is through litigation over ballot counting and voting procedures. Cases can be filed in states and then reach the Supreme Court. There's a perception that the Supreme Court might tilt towards the Republicans after Amy Coney Barrett's confirmation. Now, the Supreme Court has a conservative majority.

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The election results could also be contested if the state legislature and governors submit different results, which especially holds for states like Pennsylvania, North Carolina, Wisconsin, and Michigan. These states have Republican-controlled legislature and Democratic governors.

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Who becomes the president if election results are contested?

Constitutionally, the U.S. should determine its next president by January 20, 2021, when the current term ends. If neither candidate has secured the majority of the electoral votes, the 12th Amendment of the Constitution would come into play. In that scenario, the House of Representatives would elect the next president and the Senate would select the next vice president.

However, if Congress is undecided as of January 20, 2021, then the Presidential Succession Act would come into play. The House Speaker (currently Nancy Pelosi) would become the acting president.

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Will U.S. stock markets crash if the election is contested?

Many people have drawn parallels between the 2020 election and the contested election in 2000 when the U.S. stock market fell between the election and the end of the year. However, along with the contested election, several other factors were at play in 2000. The factors included poor corporate earnings and the unwinding of the dot-com boom.

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Looking at the current scenario, a contested election would only add to uncertainty and might lead to another delay in the stimulus. The previous stimulus helped the U.S. economy get back on track.

Stocks to buy in a contested election

If the election is contested and the market falls on the news, investors should avoid high beta and cyclical plays like industrials and metal and mining stocks. Defensive stocks like utilities might be a more stable sector to invest in if the election is contested.

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