What if markets are wrong about a Republican sweep?

Investing.com -- Markets are increasingly pricing in a Donald Trump victory and Republican control of Congress, but current polls suggest bets of a red wave aren't justified, stoking the risk of a "violent reversal" in U.S. stocks, Gavekal Research warned in a recent note.

"If Trump wins the White House but the Democrats take at least one house of Congress, or if there is a delay with a protracted period of uncertainty about the election results, a violent reversal in US equities will be possible," Tan Kai Xian of Gavekal Research said in a Tuesday note.

Betting markets are currently giving Trump a 60% chance of victory, up from 36% in early August. 

This market’s growing confidence in a Republican sweep has been underscored by recent positioning, with theS&P 500 energy sector up 16% since mid-August, while the KBW Bank Index has risen 7%. "This trend reflects expectations of more favorable policies for these industries under a Republican administration," Xian said.

But bets on a Republican sweep, or red wave, however, aren't fully justified by recent opinion polls, which show the GOP’s lead, including in key swing states, to be well within historical margins of error.

But even if the polls are wrong and Republicans do win the trifecta in Washington including the White House, Senate and the House of Representatives, then, given "current pricing the market reaction will likely be muted," Xian said.

If the election outcome, however, is "anything other than a GOP sweep—as the polls suggest is more likely than investors believe—"the market moves could be much more pronounced," Xian added.

Source: Investing.com