Like just about everything else in 2020, the concept of a single “Election Night” could well be flipped on its head next month. As we noted last week, former Vice President Joe Biden is the clear, but not overwhelming, frontrunner. At this point, it may take a tightening of the polls AND a polling error on par with what we saw in 2016, in addition to the built-in Republican advantage of the electoral college, for President Trump to pull out another surprise victory. That said, we’ve seen countless other unexpected and unprecedented developments so far this year, so we’re certainly not ruling anything out at this point!
Regardless of who ultimately wins, there’s a relatively high chance that the outcome of the election won’t be known on election night. With the COVID-19 pandemic still raging across the country, a record number of citizens are expected to cast absentee ballots, which by law can still be counted after election day in many states, including key swing states such as Pennsylvania, Michigan, Wisconsin, and North Carolina. This surge in mail-in voting, which some experts expect will ultimately account for 35-40% of total votes cast, has made the entire idea of a single “Election Day” obsolete; in fact, as of writing on October 13th, more than 11M votes have already been cast, a figure that represents 8% of the total votes cast in 2016.
Beyond the potential lag from counting a record number of absentee ballots this year, President Trump has repeatedly hinted that he may not accept the results of the election if he loses. Last month, Trump was asked, “Win, lose, or draw, will you commit here today to a peaceful transition of power after the election?” Trump’s response: “We’re going to have to see what happens. I have been complaining very strongly about the ballots, and the ballots are a disaster.” At the first debate, he did little to reassure anyone concerned about a peaceful transition of power, responding “I’ll keep you in suspense” to a question of whether he’d honor the election results.
While a US President’s power isn’t all-encompassing, Trump certainly has a number of ways he can challenge the results, running the gamut from the Electoral College representatives to new laws getting passed by the Republican Senate to contesting the result in the increasingly-conservative Supreme Court. More experienced traders are no doubt shivering recalling Florida’s “hanging chads” and “butterfly ballots” in the messy 2000 election, which was ultimately decided by the Supreme Court. Time will tell how messy this election ultimately becomes, but it’s clear that the risks of an ambiguous and/or delayed outcome are far higher than usual.
Potential Market Implications of a Delayed Election
Not to burst anyone’s bubble, but the analysis we laid out above is hardly unique. In other words, forward-looking traders have already priced in at least some risk that the result of the election won’t be immediately clear. Therefore, the key consideration for traders is the length of the delay (if any) in the election results. From our perspective, there are three general scenarios, each with different implications for markets:
1) The Winner of the Election is Clear on Election Night
As we noted above, this scenario is less likely than usual, but cannot be ruled out. Based on the polling data we have today, the most likely way this scenario would play out is with a “Blue Wave”, where Biden comfortably wins enough states that the result is robust enough to withstand any surprises from late mail-in ballots or legal challenges from Republicans. If this scenario plays out, we may see a knee-jerk “risk on” reaction; in other words, global stock market indices could rally, higher-yielding currencies could gain ground at the expense of safe havens like the Swiss franc and Japanese yen, and Treasury bonds may sell off (yields may rise) as traders worst case scenario comes off the table. At that point, traders would start to look ahead to the specific policy priorities of the Democratic party to evaluate the likelihood of stimulus and specific industries that may benefit.
2) The Winner of the Election is Determined in Early/Mid-November
Based on our analysis, this is the market’s “base case” scenario as it stands. That means that the market moves may be less dramatic than readers would otherwise suspect from a situation where the proverbial “leader of the free world” is unknown. However, once the result is known and accepted, markets should quickly move past the brief period of uncertainty and look ahead to the specific policies of the winner (in combination with the party that controls the Senate) as drivers for different markets.
3) The Winner of the Election is Not Known Until Late-November (or Later!)
This is the doomsday scenario for risk appetite. A full-blown constitutional crisis, loss of the US’s standing on the global stage, and widespread civil unrest could all be in play depending on how long the uncertainty over the result lingers. If this situation plays out, we’re likely to see risk assets like stocks and higher-yielding currencies come under pressure, while safe havens like the Swiss franc, Japanese yen and gold could benefit. Traditional US safe haven assets like the US dollar and Treasury bonds may fail to catch their usual bid if global investors start to question the stability of the US more broadly.
As we’ve seen in recent years, it’s hard enough to handicap which candidate will win a given election, but this year, traders may also have to wrestle with uncertainty around when the result will be known. The best strategy for navigating this historic election is to lay out a game plan with different scenarios, as we have above, and remain flexible enough to adapt to the headlines as we get more clarity.