Ahead of Election Day, Wall Street pulled back from the brink, with all three major indices higher on Monday — although the market’s so-called “fear gauge” also rose as both presidential candidates spent the last day of a bitter campaign making their final pitch to voters in battleground states.
Even in a year rocked by social unrest, economic crisis and a global pandemic that has left more than 200,000 Americans dead, market analysts said 2020 might still have the potential to shock.
The potential for President Donald Trump to claim victory over former Vice President Joe Biden even in the absence of a clear Electoral College win is investors’ biggest — albeit less-likely — worry.
“An outright succession crisis is the worst-case scenario,” said Ryan Giannotto, director of research at GraniteShares. The United States has never faced that kind of a crisis, and the entire country, Wall Street included, would be in uncharted territory. “We can’t pull out a precedent to see what that would look like,” he said.
The Chicago Board Options Exchange's CBOE Volatility Index, a sort of proxy for investor anxiety, hovered between 38 and 39 on Monday — just below half of the all-time high it reached in March, but still sharply higher than the mid-teens level at which it started 2020.
Election Day market performance illustrates Wall Street’s dislike for uncertainty. In 2000, the country waited for more than a month to find out if George W. Bush or Al Gore would become the next president. Markets at the time were digesting the slow-motion collapse of the dot-com bubble, and the S&P 500 dropped by nearly 5 percent between Election Day and when the Supreme Court ultimately ruled in favor of Bush on Dec. 12. In 2004, worry that the election could once again be close enough to trigger a drawn-out fight pushed down the Dow Jones Industrial Average.
On Election Day 2008, an election in which Americans sent Barack Obama to the White House and delivered both chambers of Congress to Democrats, the three major indices all rose by between 3 and 4 percent. That election was held during what was then the worst economic crisis the country had seen since the Great Depression, and the market gave back those gains plus roughly a percentage point more the following day, as Wall Street speculated that a solidly Democratic government would lead to higher taxes and more regulations.
Market observers say the concerns of investors, who are already on edge because of the pandemic, are magnified this time around, especially if a weeks-long fight imperils a fiscal stimulus bill. “If this drags out longer than the Bush-Gore scenario, then we’re most definitely going to see the downward pressure extend to the market as a whole. And until we get certainty, we won't see any moves to the upside,” said Aquiles Larrea, CEO of Larrea Wealth Management.
Some argue that the election, no matter how contentious, will still take a back seat to the pandemic, as the trajectory of Covid-19 continues to alarm public health experts and raise the specter of an overwhelmed health care system.
“It will come down to the virus,” said Constance Hunter, chief economist at KPMG. Unlike the Asian economies that learned from their bout with SARS nearly two decades ago, Hunter said Western economies initially underestimated the risk. “Europe and the U.S. really, I think, took it a little too lightly, did our victory lap a little too soon — and this is a very, very pernicious virus,” she said.
Without a rebound in the service sector, the fallout will begin showing up in more parts of the economy, Hunter said. “Services consumption is still well below pre-pandemic levels… That’s 45 percent of our economy, so it’s really important we get a handle on the virus, and if we don't, we’re going to see pressure on the financial markets.”
"We want to make sure that whoever is in power gets the fact that this stimulus package needs to happen right away."
The more acrimony there is on Capitol Hill, the harder it is for investors to see a path to a much-needed stimulus bill. “The last thing we want to talk about is the foreclosures, increased debt and malaise that could happen if we have this longer-term scenario play out,” Larrea said. “We want to make sure that whoever is in power gets the fact that this stimulus package needs to happen right away.”
While Wall Street has typically been at best lukewarm on a Democratic government, the pandemic has changed the math. Democrats, particularly if they gain control of both the White House and Congress in a “blue wave,” are seen as far more likely to implement a large stimulus plan. “In terms of sentiment, we’re going to be seeing a lot more positive sentiment if there’s a blue wave,” Larrea said.
But while a Democratic sweep is a narrative analysts have cited often in recent weeks, it is far from the only potential outcome. Michael Schumacher, managing director and head of rate strategy at Wells Fargo Securities, said there were other scenarios that investors should be considering. “One we think is under appreciated, and that’s the chance that Joe Biden wins the presidency and Republicans keep the Senate,” he said. “I do suspect the markets are a little too comfortable,” he said.
The bottom line is that the sooner there is a resolution — any resolution — the easier investors will breathe. “It's the indeterminate outcome that’s really the problem,” Giannotto said, pointing out that the markets didn’t have a major response to the widespread racial justice protests — some of which turned violent — following the death of George Floyd at the end of May. “The market continued to rally throughout the unrest in June. It’s a question of succession, and that has more direct economic implications.”