The US Election - Too close to call
US Election – too close to call
It’s possible that we’re now just a few hours away from knowing who the next President of the United States will be. It’s also possible that we’re not. What is quite extraordinary about this election is the significance that postal voting (mail-in ballots) has played, and may continue to do so, in deciding the final outcome. Over the weekend, USA Today reported on a study by Michael McDonald, a professor at the University of Florida, which calculates that over 92 million Americans have already cast their votes. That’s more than two thirds of the total votes cast in 2016 when previously, postal votes tended to count for 3-5% of the turnout.
Fears over coronavirus infection rates, as well as an eagerness by many citizens to ensure their vote is counted, has led to an explosion in the postal vote. In addition, in states where the polls open days before election night, millions of voters have already made the pilgrimage to make their vote in person, including Donald Trump. The general view amongst commentators is that this favours the Democrats. Certainly, the polls continue to give Joe Biden a healthy lead. But in the key swing states which will decide the electoral college, any lead by either candidate is well within the accepted margin of error.
But all this postal voting presents a problem. In some states these votes can be counted as they come in. But for the majority, postal votes can’t be counted until the polls close on Tuesday night. Not only that, but some states allow a significant window for postal votes to arrive in even after poling day itself, as long as these votes were posted no later than election day. For instance, Illinois allows up to 14 days after election day for postal votes to be delivered and counted. Again, it is the swing states where this will really matter.
So, there’s a significant worry that we won’t know the result immediately as crucial postal votes could take weeks to count, and possibly have to be recounted where the numbers are close. This raises the probability of extensive legal wrangling from both sides, potentially making this election as contested as the George W Bush/Al Gore clash in 2000. Back then it took a Supreme Court challenge and 34 days for the winner to be decided. Ultimately Bush won with 271 electoral college votes – just one above the number required to seal the deal. This means the tellers have to work against the clock as the deadline for each state to certify its result is December 8th (35 days after the election) or six days before the Electoral College convenes on December 14th (the first Monday after the second Wednesday in December).
Any delay in declaring a new president would also hold up a decision on key stimulus measures which are required to support the economy as the coronavirus pandemic continues to rip. The general consensus is that a delay would unsettle investors who would look to reduce their exposure to risk assets, such as company shares. Of course, investors could just sit on their hands, clear in the knowledge that a result will be forthcoming. But there is likely to be an effect in the underlying economy as uncertainty could drive up the cost of borrowing, while businesses and households rein in their spending.
There are also concerns that either side will dig in and refuse to accept losing on a close vote. This is particularly thought to be an issue with Trump who has made his disdain for ‘losers’ apparent, whether it be at golf or on the world stage. But the Biden campaign could take a similar approach, arguing that four more years of Trump is effectively the ‘End of Days’ which must be blocked, no matter the cost. For all these reasons the prevailing view is that a clear victory on Wednesday morning for either candidate would be the most market-positive result. It would provide relief by removing uncertainty and could unleash a surge in risk appetite, at least in the short-term. What happens after that is anyone’s guess.
There are about eight ‘battleground’ or swing states which could reasonably be won by either Biden or Trump. But of these it is Florida and North Carolina which could prove to be key – not necessarily in telling us definitively who has won, but in indicating to the markets who is most likely to. Firstly, both states typically manage to finish counting their mail-in and in-person ballots before the end of the night. Secondly, Trump will find it extremely difficult to clinch victory without winning Florida, and this is what markets will conclude. Alternatively, if the vote in the North Carolina senate race goes to the Democrats, it would suggest a significant shift towards a Biden presidency. There will still be key slow-counting states such as Michigan, Wisconsin and Pennsylvania to decide the result. But a Trump win in Florida and North Carolina would suggest that the pollsters were wrong, yet again, in forecasting a Democrat victory.
The polls have shown a consistent and large lead for Joe Biden for months now. However, some election analysts have encouraged caution in taking this lead at face value. It’s not just because the polls were wrong last time. In fact, in terms of the popular vote they weren’t far off. But it’s all about the electoral college. And in most of the swing states the polls are too close to call for either candidate, with the difference between the two well within the accepted margin of error. On top of that, there’s little doubt that many potential Trump voters have been wary and unwilling to publicly declare their voting intentions. Yet when Gallup polled a group of voters and asked them, not ‘who will you vote for’, but ‘who do you think will win’, 56% went for Trump with only 40% for Biden. Another poll showed that 56% of US voters feel better now than in 2016, despite coronavirus. This is another indicator suggesting that it may not be plain sailing for Biden. On top of this, looking back over past presidential elections, candidates who promise tax rises (like Biden has) tend to lose. And when the stock market is considered, the performance in the S&P 500 in the three months through Election Day is 87% accurate in predicting the election winner. Historically if the performance is positive the incumbent party has won. If performance is negative the incumbent party has lost. This certainly isn’t scientific, but it does suggest that Trump isn’t out of the running.
Are we there yet?
This Presidential Election has been the most divisive in living memory. Not only has the discourse between the two candidates been uncouth and unedifying, but it comes against the backdrop of serious civil unrest across the US. Most people will be hoping for a clear and decisive result which will clear the air and pave the way for the country to deal with all the pressing issues it faces. But there’s a fair chance that there’s no clear winner this week and that the electoral process grinds on into December. Whatever happens, trading opportunities will emerge. Just make sure that you approach these with an understanding of the risk involved, and employ solid risk and money management.