Moreover, only 40 per cent of independent voters, who account for about 40 per cent of the electorate, approve of the way Trump has responded to the health crisis.
Fear of the unknown
Markets believe the worst outcome is no outcome at all.
November VIX futures – the price of volatility protection – are notably elevated, more so than usual for an election month.
A recent survey of 1377 institutional investors by Citi found that 45 per cent expect US equities to fall by more than 10 per cent if there’s no result by Thanksgiving (26 November), with another 30 per cent expecting markets to fall by a number in the 5-10 per cent.
Why are investors more fearful of this scenario than anything else? Some investors believe the hyperbolic articles which envisage Trump ordering the army to seize ballot papers, undermining the rule of law and democracy which have an important relationship with economic development and depth of capital markets.
But this may be a misguided fear. States run the election, not Washington, and the concession of the incumbent is not required for power to transition.
We think investors’ should be more fearful of a stimulus stalemate.
While the result is still contested, additional fiscal stimulus is unlikely to happen.
This would be risky even in the absence of any other bad news, but it could be very problematic if the economy or the virus took a turn for the worse during that time.
While a delayed stimulus increases the risk of harming the economy permanently, its long-term impact that will be minimal.
Moreover, while the fiscal backstop may be removed temporarily, the monetary backstop of very low interest rates and quantitative easing would remain operational, and supportive of stock markets and the economy.
A very long delay to the result is unlikely, but some judicial challenges could happen, delaying the result for a short period.
And while we don’t think it is a useful comparison, for reference, the S&P 500 fell by 4 per cent between election day 2000 and the 12 December, when the Supreme Court intervened to rule in Bush’s favour.
It underperformed the MSCI World Index by 0.8 per cent. But this decline coincided with the start of the dotcom market crash, so will not be a precise example of what may happen this time.
A Biden bounce
The second most adverse scenario for markets according to the Citi survey is a Democratic clean sweep – Biden in the White House, Democrats controlling both chambers in Congress. Some 23 per cent of respondents expect US equities to fall by more than 10 per cent, with another 25 per cent expecting a 5-10 per cent fall.
