Would a delayed election impact the financial market?
The US election is likely to cause chaos — in more ways than one. The ongoing COVID-19 crisis has thrown a wrench into the conventional voting process, prompting partisans from both sides to anticipate the rising likelihood of a controversial election. The ghosts from the past, in particular, the 2000 election, may resurface, causing a delay. Meanwhile, all this certainty means only one thing for the financial gurus: volatility.
What happened in the 2000 election?
When Al Gore and George W.Bush locked horns in 2000, all eyes were fixed on Florida to decide the outcome. However, the uncertainty didn’t sit well with the market as the New York Times declared “Wall Street Wants a Winner” after two days of the election. The NASDAQ soon plunged to 5.4%, but there was less drama in other sectors, which indicated optimism that businesses would stabilize quickly.
However, Al Gore’s tenacity was in full display in a post-election-day interview. By that point, everyone knew that Al Gore was going to test his luck and fight. As a consequence, share prices dropped sharply. The atmosphere was best described by a trader who said:” The market doesn’t like not knowing who the Leader of the Free World is going to be.”
When November came to an end, the NASDAQ plunged around 19%, and the S&P dropped 10%. When rumors made it seem that Gore was going to concede, a market rally followed, swiftly ending after Gore denied the rumors, resulting in a 5% drop in stocks.
Blockchain Voting and The American Elections | Data Driven Investor
In less than 70 days, the world's oldest democracy will be facing its biggest showdown in an unprecedented way and at…
The whole 34-day period was an insightful lesson about risk and uncertainty, as explained by Frank Knight, the renowned economist, in 1921, especially his reference to the measurable risk and measurable uncertainty.
The political instability during late 2000 led traders to realize that they didn’t have any viable method to make calculated bets over the result.
After the Supreme Court declared Bush as the winner, the market rebounded shortly after. But, the gradual decline resumed after some time, bottoming out in 2002.
A brief overview of the 2016 election
Last time in the 2016 election, volatility appeared in the major indices, including the S&P 500 Index. Initially, the Brexit episode — when the UK’s announcement’s to leave the European Union forced the markets to react, and then the Clinton vs. Trump showdown brought its share of volatility. Check the following chart and note how the Cboe VIX (represented by the purple line) went above 20.
The markets tanked on the surprise outcome of Trump winning. The US stock market futures tumbled by around 5% initially as the global investors tried to make sense of one of the biggest upsets in the US election history. Sometime later, Trump’s vowed to “bind the wounds of division” with a new set of promises, which led to a market revival.
Is this the time to go for safer assets?
If history is any guide, the global markets tend to react sharply after the US elections. Historical data shows that when ten days pass after a Democratic victory in the election, the S&P MidCap 400 and S&P 500 tend to be less favorable. Meanwhile, following 100 days after the election, the equity market tends to be less optimistic in a Republican victory. An exception was in Barack Obama’s first win that was marked by the 2008 financial crisis.
According to Société Générale, a French-based investment bank and financial services company, Trump’s tenure will be slightly more favorable for the US equity market as compared to a Biden presidency. Although the firm expects the 2020 election to run into a bumpy road and has warned others regarding the risks of a delayed result, it is reasonably confident that this will not affect the US equities’ uptrend.
Thomas McLoughlin from UBS believes certain factors may compel Trump to contest a Biden win. If there is no clear winner one day after the election, market volatility will gather steam, which is why McLoughlin recommends switching to more stable assets. Since markets dislike uncertainty, the US government securities and gold are the safer options.
The preference for the incumbent
Although Republicans generate better average returns than Democrats, an incumbent’s re-election produces better results over a newly-elected president. It happens when the prospect of seeing an incumbent getting re-elected offers more certainty to the investors than a fresh candidate running for president. The opposition’s win has a higher risk because it implies that potentially radical change is on the cards. It also means that unlike 2016 where both contenders were new, the 2020 election is more stable from the financial viewpoint.
Meanwhile, Goldman Sachs has warned its clients that someone could delay the 2020 election. It recommends to hedge their market bets in December, anticipating rising volatility throughout November.
David Kostin, the US equity strategist in the Goldman Sachs, explained that multiple factors are bound to delay in the election outcomes, such as the mail-in ballots — introduced to help people vote during the ongoing pandemic. This unique situation has led Kostin to convey to Goldman Sachs’ clients to “hedge their market exposure” into December. With this strategy, they could control losses resulted from a delayed election.
Stability of a united government
The US system designed such that the Senate, Congress, and White House are up for grabs. It means that while a president gets elected from one party, the other party can control the Senate and the House of Representatives. Research from InvesTech reveals that average returns peak when one party assumes control over all three institutions. In contrast, they drop marginally when one party controls the White House, whereas the other takes charge of the Senate and the House.
On the other hand, in the event where one party has the Senate and the other controls the House, returns have remained worse. Presidents carry significant power over the business and economy. For instance, the president is responsible for appointing the head of the Federal Reserve. But, it is the Congress and Senate that pass laws and approve them. Hence, their support for the president is critical to introduce significant changes to the system.
Now is the time for some good news. Market volatility tends to be short-lived in the US elections. Studies show that the worst impact comes within the four trading days of a contested election outcome.
On most occasions, the US elections did not cause significant changes to the markets, known for handling political uncertainty, particularly in developed and stable democracies, thanks to a combination of pragmatism and indifference.