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Markets often get politics wrong, but it’s rare to see them price in all three of the plausible results of a presidential election—Republican, Democrat and long-drawn-out legal battle—in one night. Tuesday night and Wednesday’s vote count delivered exactly that as the voters once again mocked the pollsters, with a bonus of ending by pricing in congressional gridlock.
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In one way markets did what they should: As the probabilities shifted, prices responded in the direction one would expect. Efficient markets! Yet, the scale of the moves suggests wild swings in the mood of futures traders, from near-certainty of a win for Democrat Joe Biden to near-certainty of a second term for President Trump, before shifting to near-certainty of a mess and then back to Mr. Biden. Market craziness!HOW A CONTESTED ELECTION COULD AFFECT THE STOCK MARKET
The election count highlighted the problem markets have been giving investors since Dutch East India company stock was the only game in town: They move in the right direction, but move much too far. In the jargon, markets have momentum, and it befuddles investors. In times where information is scarce, momentum takes over—a problem visible not just since the election but in the markets for much of this year.