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Market Brief – Election Update: T-Minus 7 Days

As we approach Election Day it feels more like Apollo 13 approaching re-entry. Events have occurred leaving us vulnerable and wounded, limping duct-taped together towards the horizon.  We are strapped in. We are committed. Hurtling white knuckled towards an inevitable and uncertain conclusion. Counting down the seconds (days) until we either successfully land or crash and burn while the whole world watches. Anxiety and stress are high with the potential of failure lingering over every decision. The calculations are being made, the die is cast, all that is left is to execute the mission next Tuesday.  Nonetheless, similar to mission control and the astronauts, we must remain calm and collected and make rational decisions. And just like Apollo 13, this election can end successfully as a non-event. I know tension is high and the news is talking about all the ways this could go wrong, but don’t forget about all the ways it can still go right.

Full disclosure, I do not know who will win next Tuesday. Nor does your Facebook friend who has suddenly become a Constitutional scholar. Nor do you. I caution you against confusing what you personally desire to happen, and what the facts and current landscape are signaling. Polls are tightening in this last week with more and more states being declared within the margin of error, with tensions rising over the fear of a contested and undecided election. Right now, you can make a solid argument for a large Trump victory, a large Biden victory, briefly contested election, and the worst fear (and lowest probability) an undecided election and no President selected by inauguration date. I cannot predict an outcome, but I can provide you 10 key points to help get you through this week:

  1. Never forget the most dangerous words for an investor, “This time it’s different.”
  2. Per Bloomberg Analytics, as of Monday 10/26:
    • VIX futures pricing in lower volatility- betting on a “clean” election, with the spread between Nov & December VIX Futures very low and narrowing
    • Markets pricing in and anticipating Biden win, non-contested election
    • Real Clear Politics Polls: 50.8 Biden, 42.8 Trump. On 10/26/16 it was 48.4 Clinton, 43 Trump so a slightly wider margin but not much. At this point in 2016 they were putting an 87% chance on Clinton victory.
    • Betting Odds (PredictIt): 64 Biden, 41 Trump
    • Odds of a “Blue Wave” have fallen from 62% in early October to 51% as of Friday
  3. States that bear watching:
    • PA leaning Biden, polling within margin of error, potential that Biden’s anti oil & gas remarks at the debate push to Trump
    • Florida- tossup. Always a mess. One day someone needs to adopt and fix Florida.
    • Currently, WI, MI leaning Biden OH towards Trump
  4. There is uncertainty in trusting polls considering the 2016 outcome as well as many other factors:
    • The larger than normal turnout potentially skewing projections, with many first-time voters. The AP estimates more than 25% of the early voters are new or infrequent voters. It is also estimated that 65% of eligible voters will vote in this election
    • Elevated numbers of early voters and mail in voting. More than 58.6 million votes have already been cast
    • The potential silent Trump supporter effect
    • Difficulty with trusting polling as voter turnout is highest ever in 100 years and many have already early voted or done absentee and mail in.
  5. States, especially battleground states, are taking this very seriously. Especially preparing for recounts, increased mail in votes and increased election security. Reuters did a great job spotlighting Pennsylvania and it’s worth a read if you have the time. Read article here.
  6. We have had difficult elections in our Nation’s history, all have been resolved by Inauguration Day. Unless you think “This time it’s different” history is on the side of a successful election. Unresolved election dragging on for months is a tail-risk event. Possible? Yes.  Probable? No.
  7. Biden winning does not automatically tank the market, just like a Trump win does not automatically signal massive returns. Business cycles drive markets more than presidential administrations. Whoever wins inherits multiple problems to solve rapidly: virus, unemployment, debt levels etc.
  8. We caution against speculative trades at this point (I KNOW Biden’s winning, dump all my oil stocks and buy solar, or the flip side being convinced Trump is winning and tripling your equity allocation).
  9. A contested or delayed result is not automatic doom. Remember 2000 Bush v. Gore. So, if there isn’t a result Tuesday night or it starts getting messy, don’t go running to your bunker to prepare for the apocalypse just yet. Yes, the market might sell off a few days and whipsaw, but it generally gains it back very quickly. A bad day, or week, or even month it’s best to hang in there and buy dips vs. panic sell that the end of the world is coming.
  10. This last week may get volatile as both sides are nervous. Stay the course and think long term. The tightening election, rising Virus cases, tough rhetoric, and high potential no stimulus gets done pre-election are all being digested.

So keep calm and carry on. The odds and history are on the side of a successful election outcome.

But, of course, this time it could be different?