Wall Street Fears No Clear Winner for President

If there is anything that most people know about Wall Street it's that the financial markets don't like uncertainty.  They don't like things that are rare or unheard of.  They want status quo and business as usual.

So when you start thinking about very possible scenarios of Trump winning on November 3 based on the votes cast at polling stations and then the Democrats producing mail in ballots for weeks and weeks declaring Biden as the winner and then that followed up by weeks or months in the Supreme Court...we could have a recipe for some very volatile financial markets.

There is a high probability that the U.S. elections this November are going to be a mess. There are a range of scenarios for market participants to consider that were once unthinkable. What happens if President Donald Trump loses and doesn’t concede? Or if challenger Joe Biden loses and doesn’t concede? Or if Trump again wins via the Electoral College but not the popular vote, setting off civil unrest the likes of which the country has never seen? 

Those aren’t the only scenarios. My personal favorite involves the counting of mail-in ballots, which are likely to set a record by far. Democrats generally lean toward mostly voting by mail amidst the pandemic, while Republicans tend to favor voting in person at polling stations. It is probable that Trump has a commanding lead on election night, which dwindles over the following weeks as the mail-in ballots are counted. Imagine what the political environment would be like under that scenario.

I have no particular call as to who will win the election, but as it pertains to markets, it is less about the outcome of the election and more about the process. For me, the issue with mail-in ballots isn’t the potential for fraud, it’s that they take so long to count. The world will laugh at the U.S. when Nov. 3 comes and goes and there is no declared winner—possibly for weeks.

We’ve learned that investors have placed hedges in advance of the election designed to protect a portfolio against rapid declines. Typically, this is in the form of buying plain vanilla put options on a broad market index, but can also involve more complex hedging strategies. Hedging activity is evident in the prices of futures on the CBOE Volatility Index, or VIX, where October VIX futures (the ones covering the election) are significantly higher than the surrounding contracts. (I placed a hedge on the election a few months ago.)

The hedges have become quite popular, leading to an increase in aggregate levels of implied volatility. Bloomberg News reports that this election is being priced as the most-expensive event risk on record based on a common way to bet on volatility. And what’s really unusual is that volatility has risen as stocks have gone up, which doesn’t happen very often. Part of it is due to election hedging. 

https://www.fa-mag.com/news/wall-street-fears-an-election-with-no-clear-winner-57959.html?section=68&utm_source=FA+Subscribers&utm_campaign=6bed437a8e-FAN_AM_Send_052220_A-B+Split_COPY_01&utm_medium=email&utm_term=0_6bebc79291-6bed437a8e-236452497

2020 may prove to be the most interesting year EVER for America.  From COVID shut down in March, to burning riots in May, to strange weather all summer, to biggest forest fires EVER in fall and now we head into an election that has a high probability of being a mess...which could trigger the most civil unrest that we have EVER seen.  

If you think the video of looters torching Minneapolis in May was crazy, just imagine what those same Democrat looters are going to do if Biden wins the popular vote but loses the electoral college?