Daniels Trading is nonpartisan and does not endorse political candidates. The purpose of this blog post is to provide objective, unbiased information on what we believe could happen in the markets depending on the outcome of the election or how the election may impact the markets. The content is not intended to convey a preference or state a position in support of any candidate, and the sentiments expressed do not necessarily reflect the viewpoints of our team members.
The 2020 election will go down in history as one of the most controversial of all time. A record-setting vote count upwards of 150 million, the challenges posed by mail-in voting, and charges of fraud set the stage for a challenged outcome. The injection of uncertainty meant one thing to the futures markets: volatility.
Election 2000: Bush vs. Gore
It’s important to remember that the 2020 election isn’t without precedent. The Bush-Gore presidential race of 2000 involved U.S. Supreme Court (SCOTUS) hearings and a recount in Florida. Ultimately, the process took 37 days to resolve. Given the legal challenges raised by the Trump campaign and razor-thin margins in Wisconsin, Pennsylvania, Georgia, and Arizona, a final decision in the 2020 election may take considerable time.
Back in 2000, the impact of the contested election was extremely negative for risk assets and related futures markets. From Election Day 2000 through Dec. 31, 2000, U.S. large caps struggled, led by a 7.8 percent decline in the S&P 500. Small, growth-oriented companies fared moderately better, with the Russell 2000 losing only 4.4 percent for the same period. The DJIA showed immediate strain, plunging by approximately 6 percent in the two weeks following Election Day.
Conversely, safe-haven assets surged amid the uncertainty. From Election Day 2000 through the SCOTUS verdict in mid-December, gold rallied by more than 2 percent. In addition, U.S. 10-year Treasury bonds gained nearly 4 percent.
During the chaos of 2000, participants in the futures markets cut exposure to equities in favor of traditional safe havens. Will the same trend hold true in 2020?
How Will the Futures Markets React to a Contested Election in 2020?
On Nov. 9, 2020, U.S. Attorney General William Barr authorized the Department of Justice to investigate claims of election fraud. The action came on the heels of multiple lawsuits filed by the Trump campaign in the states of Pennsylvania, Nevada, Michigan, Georgia, and Arizona. Not even one week after Election Day, a contested outcome was inevitable.
However, the immediate price action toward risk assets didn’t reflect election uncertainty. U.S stocks and equities futures markets posted massive rallies in the week that followed Nov. 3, 2020. Driven by news of an effective COVID-19 vaccine and the Associated Press (AP) calling the race for Joe Biden on Nov. 7, U.S. stocks spiked on Monday, Nov. 9. The headliner of the action was a DJIA 834-point gain, the largest intraday uptick in five months.
At least in the early aftermath of Election Day 2020, the performance of stocks suggested that political uncertainty was receding. Nonetheless, the CBOE’s Volatility Index (VIX) continued to trade near 25 on Nov. 9, well above its long-term average of 20. Although asset pricing remained strong on Wall Street, options and futures traders continued to expect forthcoming volatility.
So how could the contested 2020 election drive market volatility? Here are a few events sure to spike capital market participation:
- Recounts: The rules for automatic recounts vary on a state-by-state basis. At press time, recounts in Georgia, Arizona, and Wisconsin are reportedly possible.
- Litigation: The Trump campaign has alleged widespread fraud and has filed associated lawsuits. Favorable rulings in this area could drive market uncertainty.
- Supreme Court decisions: Any cases heard or decisions rendered by the SCOTUS involving the 2020 election may drive intense volatility. If the SCOTUS is called upon as it was in 2000, the market tumult may be severe.
As of this writing, Democratic candidate Joe Biden has been projected as the new president-elect by the Associated Press by virtue of exceeding 269 electoral votes. In the event that this outcome is impacted by recounts, litigation, or the SCOTUS, heightened volatility is certain to impact futures markets across the board.
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Staying abreast of key political developments and their potential market impacts is a full-time job. Fortunately, Daniels Trading’s online Trading Advice portal provides traders with timely, expert insights into evolving market dynamics. Whether seeking input from an experienced Daniels Trading broker or a trusted third party, Trading Advice is an indispensable resource during uncertain times.
