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Investors Won’t Be Happy on Election Night

Conor Sen

(Bloomberg Opinion) -- Markets haven't forgotten the volatility in the days before and after the 2016 election, and they're already pricing in uncertainty ahead of the 2020 vote. But because long-term trends in how voting is managed in the U.S. have been amplified by the pandemic, we shouldn't expect to have much clarity on the outcome on the night of Nov. 3. Investors need to be prepared for Election Day to turn into Election Month, with key races possibly not being called for days or even weeks.

The most dramatic shifts in markets after the 2016 election may have been in bank stocks and interest-rate markets. Between Election Day and the next Tuesday, the KBW Bank Index rose 13.9% while 10-year Treasury yields rose 0.35%. A note put out by Bridgewater Associate's chief Ray Dalio at the time may have summed up what investors were thinking -- that Donald Trump's victory represented a shift toward policies that would benefit domestic manufacturing and business.

Although that's how markets eventually priced in the election results, the initial move on the night of the election saw equity futures plunging, hitting a limit-down threshold of 5% before later reversing. Before the election, there was even some thought that a Trump win would mean a Brexit-like plunge for stocks.

All of this is just a reminder of the kind of volatility that occurred when the outcome of the presidential election was known in a matter of hours. It's very unlikely that we're going to get the same kind of clarity this time.

One reason is because of the growing use of voting by mail, which is sure to set records in 2020, at least in part because of the coronavirus. In California, where more than half of all ballots have been cast by mail since 2012, we've become accustomed to counting taking place over weeks. In 2018, the congressional race in California's 21st district wasn't called until Nov. 28, three weeks after Election Day. In Arizona, a key 2020 battleground state where mail voting has been growing, it took more than a week to declare a winner in the race for secretary of state.

The coronavirus outbreak occurred in the middle of the 2020 primary season, with post-pandemic elections showing the kinds of situations we might see across the country in November. Georgia's primaries on June 9 made national news not so much for the outcome as for voting problems, with understaffed precincts and some people waiting hours in line to cast ballots. It also had record vote-by-mail participation. Several high-profile primaries that initially looked like they would require runoffs were later called as absentee ballots were counted. As of June 22, 13 days after polls closed,  more than 100,000 ballots had yet to be counted.

It's most likely to be a similar story for yesterday’s high-profile primaries in Kentucky and New York, with final results not expected for days or even weeks.

For November, the range of outcomes election analysts predict is anything from a repeat of 2016 with a close contest decided in battleground states to a Joe Biden landslide. There will probably be enough information on Election Night to know which scenario we're in, but that alone may not be enough to establish a winner or reduce uncertainty for investors.

In the first scenario, a close race like that in Arizona, we could be waiting a week or more for all the mail ballots to be counted. It's also worth recalling what happened in 2018, when Republicans were leading in several statewide races on Election Day but Democrats won in the end because of the mail vote. A similar result in 2020 could find Trump leading in battleground states on Election Night only to have that lead slip away as the mail votes were counted.

But even signs of a Biden blowout on election night wouldn't eliminate uncertainty for investors; it would merely shift to U.S. Senate races that Democrats might be in position to win as mail ballots were counted. In a competitive presidential election, Democrats have a reasonable chance to win Senate seats in Colorado, Arizona, North Carolina and Maine, while probably losing a seat in Alabama. That kind of outcome combined with a Biden win would give Democrats 50 Senate seats, enough for a majority with the vice president casting tie-break votes. In a landslide, however, Democrats might be competitive in Senate races in Georgia, Iowa, Montana, Kansas, Alaska and Texas as well, significantly expanding their majority, and giving them the margin and mandate for a much more ambitious policy agenda.

The bottom line is that we're probably not going to know the partisan makeup of the federal government in 2021 until well after Nov. 3. Investors should brace for days or weeks of turmoil and volatility as all the votes get counted.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist. He has been a contributor to the Atlantic and Business Insider.

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