A few weeks back, I documented the extent to which Wall Street is preparing for the possibility of a disputed US election outcome.
At the time, Donald Trump was assailing mail-in ballots on a daily basis, going so far as to tell Fox’s Maria Bartiromo that “if we don’t make the deal [for more virus relief], that means they can’t have universal mail-in voting”.
That comment (among others) raised eyebrows. To the president’s critics, it was evidence to support the contention that recent organizational changes implemented by postmaster general (and Trump donor) Louis DeJoy may have been partially motivated by a desire to influence the election. DeJoy vehemently denies this.
Read more: Wall Street Weighs Prospect Of Contested Election Outcome
Fast forward a few weeks and evidence of consternation around the vote continues to grow.
“Despite the fact that elections, even for President, have not been a reliable catalyst for volatility in the past, a wide range of asset classes are already pricing historically high event risk into options markets”, JPMorgan’s Josh Younger wrote, in a Tuesday note.
“US rates, credit, and equities are all pricing elevated risk of a delayed or inconclusive result”, he added. Earlier this week, in a note that garnered quite a bit of attention, Younger’s colleague Marko Kolanovic suggested investors may be underestimating the odds of a Trump victory.
If there’s one thing that seems certain it’s this: nothing is certain. We are in uncharted waters on a variety of fronts, not least of which involves the juxtaposition between widespread mail-in voting and a notoriously litigious incumbent.
Note that although “litigious” very often carries a negative connotation, it doesn’t have to. That is, you needn’t read the above as criticism, even if that’s how I meant it. The fact is, Trump is not shy about litigating, and he has, on too many occasions to count lately, claimed that this is poised to be what he calls a “fraudulent scam”.
On the other hand, Joe Biden could fairly easily win the popular vote and lose the election, in a repeat of 2016. FiveThirtyEight editor and statistician Nate Silver laid out the numbers on Wednesday, in a tweet (below).
You'll sometimes see people say stuff like "Biden MUST with the popular vote by 3 points or he's toast". Not true; at 2-3 points, the Electoral College is a tossup, not necessarily a Trump win.
OTOH, the Electoral College is not really *safe* for Biden unless he wins by 5+.
— Nate Silver (@NateSilver538) September 2, 2020
One can certainly understand why markets are, to quote Younger again, preparing for “delayed or inconclusive results”.
Indeed, it’s hard to imagine either side accepting a narrow defeat on election night. In other words, Trump is probably correct to suggest that one way or another, America won’t know the results for weeks, if not longer.
“Delays in getting the results are atypical for the US elections but can occur, as seen in 2000”, JPMorgan’s Younger went on to remark.
And yet, equities remain undeterred for now, even as hedging costs rise.
“A high degree of uncertainty will remain a fixture of the outlook for the foreseeable future, so then why do risk assets continue to perform so well?”, BMO’s Ian Lyngen, Ben Jeffery, and Jon Hill asked, in a Wednesday note.
Their answer won’t surprise you. “The juxtaposition of lower yields and higher stocks can be chalked up to the market’s faith that the Fed will not hesitate to offer additional accommodation in aggressive fashion”, Lyngen went on to say.
He cites Tuesday remarks from Lael Brainard, whose “pivot from stabilization to accommodation” comment perhaps tips the Fed’s intention to increase WAM in the months ahead, something markets do expect in light of increased coupon supply and the assumption that a disorderly bear steepening episode is seen as a complete non-starter at the Eccles building.
The bottom line, BMO’s rates team wrote, is that “the relationship between equity volatility and financial conditions has all but institutionalized the Powell put, meaning that there is limited scope for risk assets to fall in the very near term”.
On Wednesday afternoon, stocks accelerated in late trading, this time with the S&P and the Dow leading the charge.
I’ll repeat myself from earlier this month. Whatever you want to say about any red flags this does (or doesn’t) raise about the rather precarious state of America’s democracy, from the perspective of market participants, one thing seems abundantly clear: the odds of something going “awry” (and you can define that however you want) in this election are higher than they have been for any election in modern US history.
Caveat emptor.
I don’t know what the odds were in September 2000, but something did in fact go awry in November 2000. Election day was Nov 7, and the US Supreme Court’s ruling that decided the election came down December 12, ahead of the scheduled electoral college vote on Dec 19, 2000. Now fast-forward to the presidential election of 2016. In that election, about 40% of votes were cast early, absentee, or mail-in (over 57 million votes) according to EAC.gov. Mail-in voting is not new, and it is not only a Democratic tool. As with everything else, we (via the media) are falling over ourselves giving legitimacy to Trump’s bluster, which from the very beginning should have been drowned in a tidal wave of factual rebuke (it took the media a long time to get the courage to do this with any force). We need a clear electoral result before the electoral college votes on December 14, 2020, and it is very likely that we will get it, one way or another. We know how this will go: nobody will concede on November 3, 2020. But nobody will be able to claim victory either, though Trump will try. Trump will certainly say some outright outrageous things as the initial Republican lead turns Democratic (as the more Democratic-leaning mail-in ballots are counted). This is not irregular, not cause for alarm, not cause to riot in the street, and certainly not cause to listen to Trump’s bellowing about elections being fraudulent or rigged, unless there is clear evidence. There will be a lot of eyes watching this year, certainly. As this plays out over days, people will get used to the uncertainty, and with repetition in the news, will come to understand the process. Did anybody know about hanging chads before November 2000? Yet everybody knew about them by December 2000. We don’t need the military to escort Trump out of the White House on November 8. All of the hand-wringing about the upcoming election seems to neglect how motivated the anti-Trump contingent is. Trump’s win in 2016 was based on a combination of many things, but above all it was based on poor turnout from those who might have voted against Trump. That will not happen this time. 2018 was not an accident, and 2020 will likely play out the same way.
If stock markets fall amidst the “uncertainty,” then that is understandable, and I don’t see why that should prompt any specific action from the Fed. In fact, wouldn’t the Fed be in uncharted territory if it takes actions specifically to control market response to electoral results? Not that we aren’t already in uncharted territory, but this would be quite a different thing, I think.
If anything the worry level has risen to shrill levels. What I have observed in the last 4 years is that Trump prefers to be sneaky instead of direct. He will try to undermine the process through classic voter intimidation when we are looking at his propensity to litigate and our fear he will just stay in office.
I agree that riots are counterproductive. I recall that early the concern was the bugaloo bois breaking into stores and seeding the sidewalks with goods prior to moving on. Now it seems possible the left is doing the breaking but it is clear the right is getting a pass whilst the left is getting the gas. Restraint is hard in times like this but Martin Luther King, Nelson Mandela and Ghandi understood the importance of non-violence. Why in this country are we descending into the abyss with no perspective from historical leaders? Are we doomed to acting as the lowest common denominator?