How To Avoid An Election Headache In 2020

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Most of us have strong feelings about the upcoming election. It’s tempting to believe that if our preferred candidate won, it would improve progress across a variety of concerns: the economy, social justice, the environment, and even long-term happiness.

Yet the best forecasters and decision makers are good at not letting their feelings cloud their judgement: they’re able to see other perspectives and how a given outcome can have both positive and negative consequences.

With that in mind, let’s take a cool-headed look at likely financial scenarios for the upcoming election.

2020 election: a “non-event” for markets?

We should start by identifying what’s necessary for a large market move in response to election results:

A surprise outcome → combined with dramatic changes in near-term financial policies → that have a large impact compared to normal economic news. 

First, let’s talk about what qualifies as a surprise outcome. Financial market professionals are tracking polls and betting markets actively. They incorporate their forecasts into their prices in advance of the election results, in effect betting on what they think will happen.

This means that there needs to be a surprise result for markets to move—otherwise the result is likely to be priced in already.  If one candidate is leading by a large margin, the surprise would be that they don’t win.

As an investor, this means that you’d need to know something that all the professional traders out there don’t in order to get a jump on market changes, and even then, a big market move isn’t guaranteed.

But a surprise result isn’t necessarily enough to cause a big market change. There need to be differences in near-term market factors as well.

Let’s look at the most recent presidential election as an example: in 2016, betting markets gave Trump just a 20% chance of winning the day before the election. Yet the next day, after the surprising results, markets opened flat.

The unexpected election results barely moved markets, because the market needs to believe there is a big difference in financial-related policies between candidates for a move to happen in the short term.

And finally, it’s important to remember that markets are constantly consuming a wide array of economic news like unemployment rates, trade deals, earnings calls, vaccine trial results and more. All of these tend to have a stronger and more direct impact on stock prices.

What happens on election night is usually less clear and direct than these news segments, so it’s unlikely that the election results will drive unusual levels of volatility.

An election headache, avoided.

When asked by a friend about the potential market impact of election night, he was surprised when I recommended going to bed early. Staying up late won’t change the outcome, but being sleep deprived and full of social-media induced angst will influence your experience of the result. Being unusually well rested and ready to meet the new day is a smart move.

One of the things investors could have avoided during the 2016 election was spending unproductive time watching market changes in real time.

This chart below shows the moves in S&P 500 futures trading overnight on election night.

Investors who disliked the election results saw futures going down near bedtime and put in sell orders. They awoke to a perfectly normal next day: markets actually went up a bit.

Ultimately, being tired is one of the best ways to make bad decisions.

S&P 500 Futures Trading On Election Night 2016

Alt text: This graph indicates the S&P Futures Activity before, during, and after election night on November 8th, 2016. The data shows a market dip beginning at 8:30pm and starts to climb back up around 2am, ending even higher on the market open the next day.

Hope for the best, but have plans for the worst.

Regardless of your political leanings, we foresee general market scenarios to consider, in increasing order of concern: 

  1. Decisive victory: The best case for markets is a decisive victory with the runner up conceding quickly and gracefully . We don’t foresee any significant market changes due to either candidate winning this way.
  2. Delayed victory: In this case, election results will be unclear, and possibly decided in courts. It may take weeks, perhaps even months before an “official” winner is announced, though there is an orderly and graceful transition of power.

There may be heightened volatility during this period, not necessarily due to concerns about who the President will be, but rather, markets historically dislike uncertainty and delays to resolution.

  1. Disputed election: In the worst scenario, a close election result will be disputed, and neither candidate concedes. This can lead to long-standing uncertainty about who will take over in January. Markets will likely be both lower than usual and volatile while the uncertainty remains.

Given these three possibilities, what should you do now?

Here are some evergreen ideas:

  • Know that election volatility has consistently been short-lived and not extreme.
  • Stock market returns haven’t systematically changed depending on which party is in power.
  • If it gives you peace to take action, think now about how you would want to change your plan or circumstances. Making impulsive decisions in the heat of the moment isn’t smart. Have a plan you can execute on if need be.

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