Only 21 days remain until the presidential election, and speculation on the outcome continues to run rampant. The big question on everyone’s mind is “How will the stock market react to the election?” We don’t know, of course – but the markets are offering us clues.

Market volatility has been building

Polls are favoring Biden, but due to the well-documented surge in absentee voting, we won’t likely know who the winner is til later in November. So, what will we know on election night? When will we find out who the winner is? Will there be a peaceful transition of power? And, how will the markets respond?

As we know, markets hate uncertainty. This election season is riddled with “what ifs,” and the media is certainly making it difficult to handicap with any clarity. As I’ve written recently, market volatility has been on the rise, and worries over post-election chaos has been priced in.

Is it fair to price in a big move when it is unlikely to occur? Yes, I said it’s unlikely to occur. Markets seemed to have overpriced fear and ramifications against the market. This overpricing of fear (easily seen in the VIX) has been with us for several months.

So, how will the stock market react to the election?

As we’ve seen over the past couple of weeks, fear is slowing leaking out and the consequence is a higher stock market. This is not about valuation or fundamentals, rather just a condition that needs to be corrected.

Last week, the markets fall sharply on Tuesday when the bulls felt the rug was being pulled out from under them. But then the markets roared back and closed sharply higher, within a whisker of all-time highs.

If the markets were truly concerned about the election, the economy, the pandemic, etc., would buyers have stepped up? Would volatility fall sharply? Here’s what I’m thinking: a benign response to the election may result in a mammoth rally to end 2020 sharply higher.

Of course, Trump or his administration could still rattle the market. Be ready!