National Post (Latest Edition)
Markets in for rough ride after U.S. vote
This election could be much worse than 2000
In 2000, a dispute involving ballots in just one state — Florida — delayed the outcome of the presidential election for five weeks as the matter crawled through courts. During that time, the S&P 500 fell 12 per cent due to the uncertainty. This election could be much, much worse.
This November, there could be half a dozen or more electoral snafus at the same time, which could muddy the results for weeks. It’s almost certain that the outcome of the election will remain uncertain for an undetermined period of time. It’s also unlikely that a new stimulus program to prop up the economy will be passed before the election, as the Republican Senate will be preoccupied with getting re- elected and anointing a new Supreme Court justice. These are two crucial factors that market players and business models have generally not taken into account.
There is no consensus as to how long the election mess may last. For instance, Goldman Sachs analysts claim that fears of a crisis over the outcome are “overblown.”
“It seems fairly likely that there should be enough information on election night from states that will report results quickly for the market to be able to gauge the likely winner,” wrote economists Michael Cahill and Alec Phillips. “In other words, the S&P can trade the likely outcome, even if the AP does not call the race.”
By contrast, UBS spokesmen told investors that if election day passes without a clear winner, strong market volatility will result and money may head for safe haven assets such as gold and U.S. government securities.
A worse result would be violence in the streets, mass protests, as well as a protracted dispute that may last for months, not weeks. The anxiety is fanned by President Donald Trump, who has questioned the legitimacy of the electoral process. Some worry about a coup d’etat.
But America’s institutions are strong, notably the Pentagon and the courts, and his attacks on the election may be only designed to get his supporters out on election day.
However, delays due to a large percentage of mail- in ballots will make it unlikely that the winner will be declared on Nov. 3. A firm called Good Judgment forecasted that there was a 16 per cent probability that Trump or Joe Biden would concede by the end of the week; a 43 per cent chance a winner wouldn’t be determined until Nov. 26; and a 37 per cent probability that a concession will come between late November and inauguration day on Jan. 20, 2021.
Then there are other, more worrisome scenarios that will afflict markets: if Trump claims the results are fraudulent; if left- and right-wing groups intervene at polling stations; if supporters of the two candidates clash openly in Washington, D.C.; or if Trump triggers a full- blown constitutional crisis by trying to call in the military to restore order, something the Joint Chiefs of Staff have said they will not do.
If any of these scenarios occur, markets would be left in limbo, while foreign relations, government operations and infrastructure spending would be stalled or put on hold.
This is new territory. The spectre of political mischief making, added to the resurgence of COVID-19, has caused markets to begin falling this month, as some investors took profits or pivoted to safer sectors or asset classes.
Conversely, a clear- cut winner may also emerge immediately on election night. But this won’t mean that market turmoil won’t follow. A Trump landslide victory, combined with the expected Congressional sweep by the Democrats, will set up years of confrontations. A Biden landslide and a Democratic Congress will also roil markets for a time as health care and banks take a hit and the dollar drops, but mega spending kicks in to help the recovery.
For markets worldwide, the reality is that, despite globalization, when America sneezes, the global economy catches cold and some may even get pneumonia.