FINANCE TODAY | ISSUE NO.19
2020 ELECTION DAY: THE MOST EMOTIONALLY-CHARGED DAY IN HISTORY
There has never been an election which has created more divide among the American people than the 2020 U.S. presidential election. Major issues such as racial injustice and the American COVID-19 situation have further stressed the divide between the American people that has been steadily increasing throughout the duration of President Trump’s first term. As the polls closed on November 3rd, the world sat and watched in anticipation of whether or not President Trump would best Joe Biden and earn himself a second term in the White House.
Each candidate’s priorities heading into office would have significant impacts on industries both domestically and internationally, so financial markets were very responsive to the events of election day. This election is projected to have the highest voter turnout in election history. As a result, many states are currently experiencing a backlog of mail-in ballots which may take until the end of the week (November 6th) to count. The delay has created uncertainty around who the clear winner of the election is. As investors don’t like excess uncertainty, they have been reacting and allocating funds accordingly.
THE MARKETS REACTION SO FAR
North American stock markets had been fluctuating rapidly as the outcome of the presidential race was becoming difficult to predict. Initially, markets were priced for a Biden victory which saw U.S. equity futures climb. December contracts on the S&P 500 rose by 0.7% as of 6:16 PM EST on election day (Ballentine & Greifeld, 2020). Investor confidence in Biden rose due to his promise to provide American citizens with a stimulus package in order to jumpstart the economy. Confidence in a Biden victory began to falter as both candidates began seeing similar results at the polls, neither side clearly dominating the other. The race remained close throughout the remainder of the night, with Donald Trump and the Republican party having a slight edge. As a result, futures on the US stock market rose again, but primarily in the technology sector.
These technology sector gains continued on Wednesday, as futures for the NASDAQ Composite rose 3.8%, while the S&P 500 and Dow Jones Industrial Average rose 1.7% and 0.6%, respectively. Big technology stocks such as Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN) and Netflix (NASDAQ: NFLX) were all up over 2%. These gains come as a result of the market’s bet on decreased regulatory pressure on the technology sector that would occur under a Republican-led senate (Hansen, 2020). The Democratic party is expected to try to diminish the idea of tech monopolies and redesign current antitrust laws in order to better encompass big tech companies. In the days following the U.S. election, mail-in ballots will continue to be counted in key states and markets will experience increased volatility until there is an undisputed winner in the 2020 presidential election.
Analysts have predicted three main outcomes for the presidential election and their resulting effects on the market. The first predicted scenario lends to the idea that the backlog of mail-in ballots would result in a one to two-day delay in the results which will have a negligible effect on the market (Ponciano, 2020). Since the market is already volatile due to the current level of uncertainty surrounding a clear winner, an additional delay in results will have a marginal effect on market outcomes. Once the winner is chosen, the markets will become priced for the new presidential candidate. This is likely to be the smoothest of the three proposed outcomes for the election.
The second possible outcome is that a recount is triggered, and many equity indexes would fall by approximately 5-10%. The recount would cause further uncertainty regarding the outcome than that which currently exists. It could potentially be triggered by a close election or charges of fraud at the state level filed by the losing party (Ponciano, 2020). The resulting effect is likely determined through precedent, as a similar situation had occurred during the 2000 presidential election. Results for the election weren’t received until almost a month later and at the time the American economy experienced an economic downturn. Currently, the market is undergoing an economic recovery. Market volatility is more likely to be affected by economic shocks rather than politically related issues, so the current state of the U.S. economy should help to reduce volatility experienced in the market.
The third and final outcome predicted involves a disruptive legal or legislative battle, which could also send U.S. stock prices plummeting by 5% to 10% according to LPL Financial. The battle would stem from lawsuits filed by President Trump if he were to deem this year’s election process unfair. They note that the losses could come as, “the polarizing nature of our political environment and the already fragile state of the economy [prompts] the market to price in the potential business risks of government dysfunction” (Ponciano, 2020). Of the three outcomes, this is believed to be the least likely to occur.
As of the release of this article, the outcome of the 2020 presidential election will have been decided. From then on, markets may adjust to reflect market anticipations stemming from the priorities which each party’s platform has outlined. The Republican party’s agenda includes innovating for the future via space exploration and other initiatives. A congress with this goal in mind may signal good news to come for companies such as Boeing (NYSE: BA), who is actively involved in space exploration and has experienced hardships resulting from the travel industry essentially being on hold. A Democratic win may signal gains for the solar energy sector, as the party aims to tackle environmental issues. The Invesco Solar ETF has increased roughly 130.6% over the past six months, buoyed by optimism that Biden would boost infrastructure and green-energy spending (Ballentine & Greifeld, 2020). These are only two examples of the many possible impacts on the markets as a result of the election outcome.
Ballentine, C., & Greifeld, K. (2020, November 03). U.S. Stock Futures Jump After Rally With Election Outcome on Tap. Retrieved November 04, 2020, from https://www.bnnbloomberg.ca/u-s-stock-futures-jump-after-rally-with-election-outcome-on-tap-1.1517118
Hansen, S. (2020, November 04). Markets Lose All Hope For Big Stimulus With Election Outcome Still Unclear. Retrieved November 04, 2020, from https://www.forbes.com/sites/sarahhansen/2020/11/04/markets-lose-all-hope-for-big-stimulus-with-election-outcome-still-unclear/?sh=2c50910e1f6b
Ponciano, J. (2020, November 04). Stocks Rise Despite Election Uncertainty But Here’s What Could Really Hurt Stocks Today. Retrieved November 04, 2020, from https://www.forbes.com/sites/jonathanponciano/2020/11/04/stocks-rise-despite-election-uncertainty-but-heres-what-could-really-hurt-stocks-today/?sh=3f81be362dcf