The U.S. has voted in the midst of arguably the most challenging environment for generations. Here’s our first take on the likely result and what it could mean for investors.

Amid arguably the most challenging environment for generations, the U.S. has voted to elect its next President and members of Congress, setting the course for the world’s biggest economy over the next four years.

With early results coming in overnight, it appears that the ultimate outcome may not be clear for some time, particularly given the unusually large volume of postal votes still to be counted and verified. The initial market response has been muted, however, the contentious nature of this election adds to the sense of uncertainty and could lead to elevated market volatility over the coming days.

The Likely Policy Environment

We think the first task for investors is to look beyond the current uncertainty and start to think about the likely policy environment once we have an official result.

The closeness of the vote does increase the probability of a continuation of mixed government, however, with the presidency and at least one house of congress in the hands of opposing parties. The initial market response appears to support that—technology stocks have rallied against cyclical stocks as the prospect of a large stimulus package from a “blue sweep” fades, Treasury yields have fallen and the U.S. dollar has regained some strength.

If Trump ultimately wins, a new fiscal stimulus package of relatively modest size and scope is likely, together with no major tax hikes and a continuation of the last four years’ business deregulation. With a Biden presidency, the picture is less certain, as we believe the market will need to decide not only what the balance will be between Biden’s proposed stimulus and tax and regulatory policies, but also the extent to which his agenda will be challenged by Republicans in the Senate.

Importantly, monetary policy is likely to remain accommodative regardless of the election outcome.

The Short-Term View

Bouts of volatility are likely to persist until there is a resolution of the election results. As a backdrop to that potential volatility, Treasury yields are likely to remain stable or even move lower as stimulus expectations are tempered and in response to any risk off sentiment; and defensive growth stocks in the large-cap technology sector could continue their outperformance against a backdrop of stable yields and a lesser threat from the higher taxes and tighter regulation that a Democratic “sweep” might have introduced.

While it is not our base case, disappointing news on coronavirus and vaccine developments could add to the anticipated volatility. Until the last few days, investors have largely chosen to look beyond the current resurgence of the virus in Europe and North America in anticipation of vaccine progress and renewed stimulus. Doubts about both could generate much higher volatility as we end the year.

The Longer-Term View

On a 12-month view, as we outlined in our recent Asset Allocation Committee Outlook, market valuations are less likely to be determined by the election result than by news on coronavirus infections, treatments and vaccines, and the overall backdrop of rising GDP and earnings growth, declining unemployment and accommodative fiscal and monetary policy that we think will prevail next year.

Over the coming period of uncertainty, we think it will be prudent to “stay close to home”—keeping risk levels moderate, and also recognizing that the efficacy of traditional risk models may be limited during a time of new unknowns.

That said, potential volatility may create opportunities to add to assets which could benefit from the more positive set of economic outcomes we anticipate in our 12-month view. In all cases, however, heightened uncertainty would imply a need for deeper value buffers than usual before we add risk.

There remains a lot to finalize in this election over the coming days, but for now, markets appear to have settled into pricing for mixed government, whoever prevails in the race for the White House. We will continue to watch the situation closely.

Joe Amato, Erik Knutzen and Brad Tank will discuss the election results in more detail during the CIO Roundtable Reactions webinar today at 2:30 PM EST/19:30 GMT. Register here to listen in.