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Wall Street's surprising election game plan: Morning Brief

Myles Udland
·Markets Reporter
·6 min read

Thursday, September 24, 2020

Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET.


Strategists are bracing for a contested election result.

We’re just 40 days away from Election Day in the U.S.

And it seems that this week, almost every strategist on Wall Street has weighed in with some commentary on how the election might impact markets and what scenarios investors need to be prepared for.

And this rush of commentary has had a surprising and widespread theme emerge: November 3 might not be the day on which we gain clarity about who will be the next U.S. president.

“A contested election has become the baseline,” JPMorgan strategist John Normand wrote in a note to clients published this week.

“Given the long-term rise in alternative voting methods over past 30 years; likely surge in postal voting this year due to COVID-19; and Trump’s allegations that postal voting is more susceptible to fraud,” Normand and his team do not expect election night to present a clear winner.

Normand notes that following the 2000 election, the S&P 500 declined 7% from election night until Al Gore’s concession. Though it is also likely that this episode offers only limited guidance for investors given that it’s only happened once, the last contested election came during the post-tech bubble market environment, and we’re currently in the midst of a once-in-a-century pandemic.

Stocks fell while gold and the dollar held steady during the weeks following the 2000 election in which the outcome remained uncertain. A potential guide for investors bracing for a similar outcome this year. (Source: JP Morgan)
Stocks fell while gold and the dollar held steady during the weeks following the 2000 election in which the outcome remained uncertain. A potential guide for investors bracing for a similar outcome this year. (Source: JPMorgan)

Strategists at Goldman Sachs also explored the possibility of a contested or delayed election result in a note published Wednesday, writing that “there appears to be a significant bifurcation in voting method preferences between Democrats and Republicans, with a significant majority of Democrats expressing an interest in voting by mail and a majority of Republicans preferring to vote in person.”

Goldman adds that, “This could lead to the appearance of a Trump lead on election day, but a potentially significant portion of the Biden vote still to be counted in the mail-in ballots. In a close election, such an outcome could result in claims/counter-claims of victory and/or litigation, and result in significant market volatility over an extended period.”

Strategists at Societe Generale wrote in a note published Tuesday that, “the outcome of the November U.S. election is more uncertain than ever, which is counterintuitive given that Joe Biden has a sustained lead in the polls.”

The firm adds that, “The possibility that the winners of the election will not be known on election day itself has started to be reflected in the volatility market (equity and FX vol), and the prospect of a contested outcome poses the highest risk to our broadly short-term constructive outlook on risky assets.”

Unlike JPMorgan, however, SocGen’s most likely scenario is a Democratic sweep of the White House, the Senate, and the House. Though the firm assigns only a 32% probability to this outcome, outlining how difficult forecasting this election has become.

Lori Calvasina and the equity strategy team at RBC highlighted this week that betting markets also favor Democratic victories in the White House, the House of Representatives, and the Senate, though odds for Democratic control of the Senate remain slimmest and most volatile.

Whatever the outcome, however, Calvasina notes that markets have re-attached to political developments over the last few months after the initial rally off the March lows saw stocks de-couple from Trump’s re-election odds.

“Since last summer, S&P 500 performance has mostly moved in sync with expectations regarding Trump’s re-election in the betting markets,” Calvasina writes.

“In May and June, stocks climbed despite further declines in expectations that Trump would win again, defying the positive correlations between these two indicators that had been in place. But since July, the prior relationship between the stock market and Trump has returned, with Trump’s odds improving directionally and stocks moving higher until September. In recent weeks, stock prices and Trump’s odds have both moved down modestly.”

That investors would be so focused on the election is, of course, not a surprise. Changes in tax policy, trade policy, regulatory policy, an impeachment, Supreme Court battles, the COVID-19 pandemic, and the first recession in a decade all coming during Trump’s term in office have made for a consequential four years in markets and U.S. politics.

And just as Trump has become the main cultural story in American life over the last five years, so too has Trump been the primary influence for most market narratives over this period.

It’s little surprise then to see investors paying so much attention to an election now rapidly approaching.

By Myles Udland, reporter and co-anchor of The Final Round. Follow him at @MylesUdland

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