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Election Uncertainty Remains, But Potential Outcomes Shrink

Election Uncertainty Remains, But Potential Outcomes Shrink

| November 04, 2020

Election Day is finally behind us, and we sincerely hope you voted. Since the turnout was high and over half the ballots cast were mail-in ballots, it will take longer to count them all. While we wait for the votes to be tallied, we do remind everyone we have been in this situation before during the Bush/Gore election in 2000. We went through a five-week period of not knowing the winner after Election Day, and the results were contested, going all the way to the Supreme Court. However, during this period, the market fell only 4.24%, and this drop was largely driven by other factors as we were amid the technology bubble popping.

While no one is calling winners at this point, we do have more clarity around possible outcomes. So far, we know neither a blue wave nor a red wave ever materialized, meaning neither party saw large shifts in voters. Overall, President Donald Trump and Republicans appear to be showing better than polls suggested. Not surprisingly, Democrats remain the majority in the U.S. House of Representatives. The U.S. Senate is still too close to call, but the votes are tilting toward Republicans retaining their majority. The presidential race is also tight, with votes in the pivotal states of Georgia, Michigan, Nevada, North Carolina, Pennsylvania and Wisconsin still being tallied.

The probability of a contested election has risen along with the possibility of a split Congress. Investors are therefore pricing in three things: a blue wave failed to materialize (a red wave was less probable), there’s a higher probability of a Trump victory, and there’s increased likelihood of a more fiscally conservative Congress.

As many states are too close to be called, it may take days to finalize results. Either Trump or former Vice President Joe Biden could challenge the results in the courts and request a recount. While an outcome will eventually be determined, financial markets will not like the intervening uncertainty, and extended delays will likely lead to increased volatility as investors remain on edge.

Regardless of whether an incumbent or a challenger wins, history shows us stock returns are similar from Election Day to inauguration day. If we adjust for the 2008 Barack Obama victory which was skewed by the financial crisis, returns are very similar going back to World War II. Also, one could make the argument both presidential candidates are now known commodities. Biden has been a politician for over 40 years, serving as vice president for eight years, and President Trump now has four years in office. The global economy is very dynamic, and political policy coming out of the U.S. is only one factor; hence, voting with your portfolio tends to be a bad investment strategy.

We will continue to pay close attention to the shifting political landscape and update you on what it might mean for your investments. The potential outcomes seem to point to continued gridlock, resulting in even more muted investment implications as we are already in gridlock. While elections can be emotional, retaining perspective is always important. Regardless of who wins or loses the election, there are larger economic forces at play in the global economy. COVID-19 and the social distancing measures enacted around the world to contain it will likely exert the largest influence on corporate earnings and the economy.

Remember that despite any concerns you may have against the backdrop of the elections and their implications on your financial future, we are here for you and ready to help you stay focused on your personalized investment objectives. If you have any questions whatsoever, please do not hesitate to contact us.

The views stated in this piece are not necessarily the opinion of the broker-dealer and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. The S&P 500 is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.