Wall Street is growing increasingly fearful that a contested presidential election with delayed results could cause stocks to tumble, but the market’s reaction to the Bush-Gore election in 2000 isn’t necessarily the best roadmap for what could happen this year, according to a recent note from DataTrek Research.
The last time presidential election results were held up was in 2000, when votes were so tight in Florida that a recount was initiated by the state.
The election wasn’t fully decided until a Supreme Court decision declared George W. Bush the winner five weeks after, during which the S&P 500 plunged nearly 10% by the end of November.
But that election uncertainty was only one headwind facing markets at the time, with the retreat in U.S. stocks actually starting before the election at the end of August, when a slew of tech companies began lowering earnings outlooks, DataTrek said.
The firm argues, “ultimately, concerns over tech profitability, interest rate hikes to combat inflation, and a slowing US economy were only compounded by the uncertain election outcome.”
The 2020 election, on the other hand, is a stark contrast because the U.S. economy is currently climbing its way out of a deep recession and earnings estimates continue to rise—as opposed to entering a bear market like in 2000, the report points out.
What makes this year different is that the election will happen amid an economic recovery—and the Federal Reserve has responded much faster this time around, pledging that it will keep interest rates low for the foreseeable future.
While DataTrek acknowledges that yes, election uncertainty could still contribute to short-term stock market volatility this year, “long-lasting and significant volatility usually stems from an economic shock as opposed to politically related issues.”
“All in all, yes a contested Trump versus Biden race could rattle the markets for some time, but as a compounding effect on current macroeconomic issues rather than a key driver of volatility,” DataTrek’s report said.
Many Wall Street experts have been warning for months of rising volatility around the election which could hit markets. Several factors could lead to contested or delayed results in November, especially given the rise in mail-in ballots as the coronavirus pandemic keeps many people from voting in-person.
Goldman Sachs chief U.S. equity strategist David Kostin, for instance, has warned about the possibility of a similar scenario to 2000 happening again this year. Volatility around the election is “extremely high compared with prior cycles,” he said in a note earlier this summer. “Given the several-week delay in finalizing the results of the 2000 presidential election … the elevated volumes of mail-in ballots used in recent primary elections, and potential for increased mail in ballots this November, we see heightened risk that election-related volatility could extend beyond Election Day,” Kostin said.
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