As we edge closer to the highly anticipated US elections, we can see jitters and increased volatility creeping into the markets. Biden’s lead has been diminishing lately, and the markets do not like the prospect of a tight election or prolonged uncertainty.
What Do the Latest Election Polls Tell Us?
In recent years, elections have not been the most reliable gauge. In 2016 polls failed to predict both the Trump victory and the ‘Leave’ vote in the EU referendum. However, there are not any better alternatives to polls for elections, so the markets must make do with what they can get.
Currently, several polls have Biden leading Trump and predict that he will win this year’s elections. In recent weeks, that lead has been narrowing and the race is now starting to look like a tight one. It is important to remember that we must give some extra leeway to the Republican polling numbers. Republican voters will not always identify themselves. In some cases, they will lie to provide the Democrats with a false sense of confidence. This means that with the current polling numbers, accounting for the margin error, we could be set for a tight election.
Could We See a Repeat of the 2000 Elections?
In 2000, the Supreme Court settled the elections, and many have pointed out that a similar scenario could play out this year for a couple of reasons. Voters used punch-card ballots in the 2000 elections, and ballots with incompletely punched holes were not tabulated by the machines.
This year, mail-in ballots are likely to surge amid the coronavirus pandemic. President Trump has already argued that this could lead to a rigged election. Then there is the factor that the elections could be as tight as the polls suggest. If so, this could lead to calls for many recounts, which would lead to prolonged political uncertainty and market volatility.
How Are the Markets Reacting?
The markets do not like uncertainty, and it was already expected that we would see some pick up in volatility as we edged closer to the November election date. However, with the race looking increasingly tight, the markets have been reacting a little earlier this time. At the start of the month, Bloomberg reported that hedging against the volatility through the VIX was the most expensive in history for an event-risk. You can read that report here. In the past couple of weeks, we have also seen weakness in the equities complex, with some profit-taking going on before the elections.
Volatility in the markets is likely to remain elevated until we get past the elections. I will now be looking to the televised debates between Biden and Trump (which start next week), for potential shifts in the polls.
The markets view Trump as the more market-friendly candidate, and the markets would be very likely to rally if he won re-election. Meanwhile, Biden’s economic policies are viewed as less friendly for business, and so, I would expect the initial reaction in the markets to be risk-off if he were to win.
This year’s elections should provide us with some strong short-term and long-term trading opportunities. Remember, there is no single correct way to trade a risk event, so do not feel obliged to jump into trades you are not confident in. I would argue that the longer-term opportunities will likely be more clear-cut. As such, think of missed short-term trades as better opportunities for the long-term.