As the 2020 election approaches, Wall Street is buzzing about what a Joe Biden presidency versus a second term for Donald Trump could mean for stocks. But what will the market do if Nov. 3 comes and goes, and we still don’t know who the next president is?
It’s hardly out of the realm of possibility. Millions of Americans plan to vote by mail this year, and the Postal Service has told states that it may not be able to meet mail-in ballot deadlines. Meanwhile, at Tuesday night's debate, President Tump again refused to promise he will accept voting results. The upshot, it's quite likely Americans won't know who won on election night and, if there's controversy, maybe not for weeks.
One thing we do know is that unclear results probably wouldn’t be good for markets which tend to hate uncertainty most of all.
Will history repeat itself?
You may be having flashbacks to 2000. Twenty years ago, unclear election results in Florida for the race between Republican candidate George W. Bush and Democrat Al Gore led to a recount, a Supreme Court case and a month when Americans suddenly had no idea who would lead the country.
The S&P 500’s reaction? A significant drop. The index fell nearly 5% in the first week after the election, and by Dec. 20 — about a week after the Supreme Court solidified Bush's win — it was down 11%. Markets continued to be choppy, although stocks regained some ground by the time of Bush's inauguration in January.
Of course, in the stock market history doesn't always repeat. But, given such a big decline, it would be foolish for investors to dismiss the possibility. They already appear to be expecting some volatility.
The Cboe Volatility Index — often referred to as the “fear gauge” as it’s used to measure expectations of volatility based on the S&P 500’s index options — already reflects fear of a contested election. Futures tied to the index have seen rising prices, even more so since the president began saying he might not accept the election results. Analysts say the activity indicates "extraordinary level of nervousness," The Financial Times reported.
What investors are saying
Investors have been on a rollercoaster since the coronavirus sent stocks plummeting in March, with the market then hitting record highs in late August and early September before recently pulling back again. Unclear election results would likely lead to more of that volatility, experts say.
“A worst-case scenario for the stock market would be a dragged out, contested surrender of power,” says Sam Stovall, chief investment strategist at CFRA Research.
Assuming the market doesn't reclaim its early September highs before election time — and the results are also unclear — stocks could easily end up 10% and 20% below those recent peaks, Stovall adds.
Of course, investors constantly struggle with ups and downs.
“Uncertainty of any kind generally creates volatility in the market,” says Jack Ablin, chief investment officer at Cresset Wealth Advisors. “Election uncertainty would create quite a bit of volatility — arguably to the downside — as investors try to grapple with changing forecasts.”
But what’s bad news for equities could be good for other asset classes. Gold and Treasuries — often seen as safe haven assets — could rally as investors flee more risky investments. Meanwhile, unrest and eroding confidence in the U.S. could put pressure on the dollar, Ablin says.
What should you do
When the pandemic threw the U.S. into anxiety and doubt earlier this year, investors yanked their money out of the stock market ($326 billion out of mutual funds and exchange-traded funds in March, according to Morningstar).
“Fear gets manifested through selling — and not necessarily rational selling,” says Frank Rybinski, chief macro strategist at Aegon Asset Management. “People will sell first and ask questions later.”
But you’ll be much better off if you remain calm and stick with your plan.
That doesn’t necessarily mean do nothing. Protect yourself against volatility instead of panic panicking and pulling your money to the sidelines. Check in on your portfolio to make sure you have a the right mix of stocks and bonds for your age. If the idea of a 10% or 20% drop in stock prices gives you ulcers, your portfolio is probably too aggressive. Otherwise, be ready ride out the storm.
“You need a longer-term perspective,” Ablin says.