For most Americans, November 3rd can’t come soon enough.
U.S. presidential election campaigns are always hideously long and this one has felt particularly painful, with such a deep divide between the supporters of the rival candidates. However, recently there has been increased speculation about the grim possibility of the election outcome being contested. Quite apart from the further division this would inflict upon our bruised democracy, many investors are wondering what this could mean for the economy and markets.
It is a fair question to ask for two reasons.
First, most of us remember the contested election of 2000, which helped topple the economy into recession and provided fresh fuel for an on-going bear market in stocks.
Second, the pandemic is impacting how we vote. The vast majority of Americans strongly believe in the expressed will of the people and recognize that every vote is of equal value whether it is cast by mail box, by drop box or by ballot box. However, it is clear that it will take longer to count the votes this time around because of the very large number of people requesting mail-in ballots due to the pandemic. It may well be that, as dawn breaks on November 4th, no victory has been credibly claimed, grudgingly conceded or unofficially declared.
Nevertheless, for investors, it is important to recognize that the odds still strongly favor the election producing a clear winner within a few days and the inauguration of that winner, on schedule, in January.
That being said, investors have good reason to worry that continued partisan bickering over basic public health practices could extend or worsen the pandemic. In addition, a contested election, even if the eventual outcome was clear enough, could distract Washington from providing further appropriate support to displaced workers, disrupted businesses and distressed state and local governments. The economic recovery already looks set to slow very sharply in the fourth quarter and political divisions could, at an extreme, lead to a double-dip recession, with negative repercussions for stocks in the months ahead.
We should emphasize that this is not our base case scenario and we don’t believe investors should delay appropriate investments until after the election. After all, almost all elections end up reducing political uncertainty rather than increasing it, and stocks tend to fare better when uncertainty falls. However, this is a good time to check portfolios to ensure that they are sufficiently diversified to weather extended election turmoil should it unfold, but also positioned to benefit from a global recovery from the pandemic in 2021 and beyond.
Addressing these issues in slightly more detail, it is important to emphasize that there is a big difference between and inconclusive election and an un-conceded one.
While the election of 2000 is often pointed to as an example of what could happen in a close race, it needs to be emphasized that 2000 was an extraordinary statistical fluke. First, it was the only election in over a century to come down to just one state. Second, within that state, according to the eventual official tally, George W. Bush beat Al Gore by just 537 votes out of almost 6 million cast – a margin of 48.85% to 48.84%.
We can say, with absolute confidence, that the result this November will not be that close and if, as is much more likely, one of the candidates is ahead by two or more states and by tens of thousands of votes in those states, then they will almost assuredly be inaugurated President. While the legislative and judicial machinery necessary to ratify the result is complicated and more partisan than it should be, it is hard to believe it is capable of denying the obvious verdict of the people in any state.