The One Certain Election Trade

By: Spencer Israel

The one thing everybody seems to agree on with two weeks to go until the election is that nobody, especially the market, is sure of anything. 

Maybe this is a side effect of 2016. Regardless, here are some insights from recent headlines: The market wants Biden to win. But six months ago it wanted Trump. A “blue wave” would be good for stocks. But investors are also extremely skeptical whether that’s the case.

Joe Biden would be more likely to get another round of stimulus passed—investors like this. Joe Biden will also try to raise taxes—investors do not like that. Donald Trump could further his deregulatory agenda (good for investors) while also continuing his trade war with China (not so good).

Clearly, the market is divided. Drill a little deeper into specific industries and the consensus on the election’s outcome becomes a little clearer (if only a little). Based on their platforms, a Biden win would most likely be good for renewable energy and cannabis, and bad for big tech, private prisons, and for-profit schools. A Trump win could mean the exact opposite.

There is only one certain election trade: there will be volatility. 

In 2016, President Trump’s surprise win caused a rash of volatility on election night. Japan’s Nikkei Index fell over 5%, Hong Kong’s Hang Seng Index fell 2%, and S&P 500 futures were at one point down 5%.

According to the NYSE, 81 million shares were traded at the open the following day, more than twice the normal volume. But by the afternoon things had calmed down. Both the S&P 500 and Nasdaq 100 closed up 1% for the session, a dramatic turnaround considering the overnight volatility. From there we were more or less off to the races.

This time around, things may not be so simple. 

As Nov. 3 gets closer, it seems less and less likely that we’ll have a definitive winner that night. If that’s the case, traders will immediately look to what happened in 2000, when the S&P 500 fell roughly 5% during the five weeks it took Al Gore to concede. 

The options market is perhaps predicting this, as implied volatility in VIX futures remains elevated well into November

Perhaps any hypothetical delay will be resolved by Nov. 17, by which point all ballots have to be counted in the key battleground states. Barring any constitutional catastrophe, any dispute will be resolved by the Dec. 8 “safe harbor” deadline, by which point states must declare a winner.

In theory, what investors (and everyone) should be hoping for is a blowout in favor of the candidate of their choice. A close race would mean even more uncertainty in a year where that is the one thing not in short supply.

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