Friday, 6th of November 2020
“This process of election affords a moral certainty that the office of President will seldom fall to the lot of any man who is not in an eminent degree endowed with the requisite qualifications.”
– Alexander Hamilton
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It has been an explosive week for markets, which have sharply reversed the losses seen in the tail end of October. On the heels of their worst week since the March crash, equities are on track for their best week since the start of the rebound in April. As of Thursday evening, the S&P 500 was up +7.4% for the week, the tech heavy NASDAQ was up +9.0%, the STOXX 600 was up +6.4%, and the MSCI EM was up +5.7%. We have also seen the VIX decline over 10 points from the high of 40 reached last Friday, a short but sharp rally in US bonds, and the dollar depreciate against a basket of its peers, with the DXY falling -1.6%.
Of course, these moves can be traced back to developments in the headline event of the week – the US election. And what a roller-coaster it has turned out to be. Despite feeling like a lifetime ago now, the world was readily anticipating the “blue wave” predicted by the pollsters as recently as Tuesday evening (European time). Biden was expected to sweep the election and the Dems to take a majority in the Senate, albeit a slim one. However, it became clear that this was going to be far from the case as the first votes were counted and Trump held onto the likes of Ohio, Florida, and Texas. Unfortunately for the Donald, he was unable to maintain his early lead in other key battleground states as mail-in ballots – delivered in record numbers due to the pandemic – were counted and proved to overwhelmingly favour the Democrats. With the announcement that Wisconsin and Michigan had gone blue – two key mid-Western states that Trump had flipped back in 2016 – Biden once again became the firm favourite. As of writing, most news outlets are giving Biden 253 electoral college votes and Trump 214. 270 votes are needed to win. Five states hang in the balance – Arizona (11 electoral votes), Georgia (16), Nevada (6), North Carolina (15), and Pennsylvania (20) – with counting still ongoing and the results sitting on razor thin margins. Biden simply has to win Pennsylvania or two of the remaining four states to seal a victory, while Trump would have to win Pennsylvania and three of the remaining four states. (Though if Trump wins Pennsylvania, Arizona, Nevada, and North Carolina, the result would be an unprecedented tie… that bridge can be crossed if we get there).
However, Trump has made it very clear from the outset that it will take more than a simple 270 electoral votes for Biden to “steal” the election from him. The groundwork for claims of a rigged process was laid early on by the Trump campaign, mostly founded on the premise that mail-in ballots were somehow fraudulent (particularly convenient given their blue tilt). It seemed to culminate in a rather one-sided “press conference” given by the Donald last night which, although delivered in an unusually dejected and flat tone, certainly pulled no punches. Among the highlights were unabashed accusations of outright voter fraud, the filing of lawsuits in numerous states where Republican observers were kept out from “Democrat-run” polling stations, and that mass-media had published deliberately misleading polls in order to suppress Republican voters. “If you count the legal votes, I easily won… If you count the illegal votes, they can easily try to steal the election” he stated. Regardless of anyone’s views on the legitimacy of his claims, it has made it highly unlikely that we get a final confirmation of the election result today. As expected, Trump will not go quietly into the night.
The market’s reaction to these events has been interesting to say the least, particularly given a hotly contested election was frequently touted as a worst-case scenario. Investors seem to have been more than willing to look past the uncertainty of an extended legal contest and have instead focused on the fact that the combination of a Democrat President and (slightly) Republican Senate will make it hard to push through some of the more polarising reforms. Sectors that were particularly vulnerable to tax or regulatory reform – big tech, energy, and healthcare in particular – have rallied strongly. We saw NASDAQ futures jump just shy of 5pts on Tuesday evening when the threat of a blue wave faded! On the other hand, infrastructure and clean energy have given back some of their gains as they are less likely to be on the receiving end of a spending package to accelerate the energy transition. Markets have opened on Friday with a decidedly more cautious tone, but we remain on track for a remarkable week. However, it remains uncertain how markets will behave if the election does not resolve itself shortly and with a host of other geopolitical risks to the outlook (even if they have taken a backseat this week), we expect volatility to remain elevated. Given what 2020 has delivered so far, we wouldn’t be prepared for anything else.
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