- The election outcome may be delayed by mail-in voting and lawsuits.
- The US political system has rules that ensure these obstacles will be overcome and offices filled.
- Markets may be volatile if the election is unresolved.
- Short-term volatility is not a reason to abandon a long-term financial plan.
While polls continue—as they have for months—to show former Vice President Joe Biden leading President Trump, financial markets are suggesting the vote could be close and that the outcome of presidential and congressional elections may not be known on November 3. In anticipation that markets could turn volatile if the vote's outcome is not known on election day, some investors and traders have been building hedging strategies using derivatives, gold, and options.
Concerns center on how much the COVID-19 pandemic may affect the speed with which votes are cast by mail and counted and the potential for prolonged litigation. Dirk Hofschire of Fidelity's Asset Allocation Research Team sums up the situation, saying, "There's a reasonable probability we won't know the outcome for at least a few days and maybe a few weeks after election day. The pandemic is creating huge logistical challenges for the electoral process, making in-person voting more difficult and causing delays in counting due to the high volume of mail-in ballots."
To be sure, a delayed outcome is not inevitable but regardless of the result, one thing is certain: The election result is not a reason to change your long-term financial plan. Markets may turn choppy but volatility will pass and may even provide opportunities for investors holding cash to buy stocks at attractive prices.
Challenges within a stable system
While the pandemic and the use of mail-in voting present unique circumstances, federal election law recognizes that delays are likely and includes a specific timetable and provisions for resolving challenges that may arise as votes are counted. The 133-year-old Electoral Count Act allows 35 days following the election for states to complete their counting and for any legal challenges to the results to be resolved.
As orderly as the path from election day to inauguration may look on paper, some aspects of the law are ambiguous and it's reasonable to expect that the complications involved in this year's vote could yield court cases and other delays along the way. Also, Hofschire foresees the possibility that the parties may prefer to challenge outcomes rather than concede defeat in close outcomes. "The highly polarized partisan atmosphere isn't making this situation any better and I expect a messy or prolonged aftermath could extend into December and maybe even January," he says.
There will be resolution
But while disagreement and delay in the election outcome would add yet more turmoil to a tumultuous year, it would not necessarily be catastrophic for the government or for the markets. Nor would it be unprecedented. In 2000, procedural and technical issues involving vote counting in Florida led Democrat Al Gore's campaign to challenge the declared victory of George W. Bush. After 5 weeks of uncertainty, the Supreme Court considered Gore's claims and ruled in favor of Bush on December 12. Then, as now, stocks had recently hit a record high and the S&P 500 declined 7% during the period between the election and Gore's concession. Meanwhile, the US government and economy continued to operate despite the uncertainty over who would be its next head of state.
The distributed nature of power in the US system of government is one reason why an unresolved election didn't pose a risk to stability in 2000 and isn't likely to in 2020. The president does not hold a monopoly on power and the constitution specifies when a president must leave office and provides a system of checks and balances between the 3 branches of government. The system even provides a way to deal with the unlikely event that a president would not be determined by inauguration day when the Speaker of the House would become the acting president.
Another feature that further stabilizes the system is the fact that the elected executive and legislative branches are not the only pillars upon which government sits. Unelected entities such as the Federal Reserve, administrative agencies, and courts play important roles in the making and implementing of government policy and continue to operate predictably, whether or not the outcome of legislative or executive branch elections is known.
How might markets be affected?
While laws govern how to resolve a contested election, there are no rules that limit how volatile financial markets may become or what might trigger that volatility. Historically, the record shows markets do respond to political and other non-financial events and many investors expect that an unresolved election result could be accompanied by increased volatility in markets, as was the case in 2000. "Given the pandemic, passions surrounding this election, and uncertainty about how and when the election results may be resolved, it would not be surprising if markets got volatile," says Hofschire.
Markets dislike uncertainty and they can prepare for events that they can see coming. They are also efficient and stock prices often reflect risks that investors believe may exist in the future. Unlike the contested election of 2000 which caught markets off-guard, many observers believe that today's stock prices reflect expectations that the election may not initially produce a clear winner. Those factors could reduce potential volatility if the election is unresolved. The abundance of hedging strategies being employed by cautious traders might also produce a rally if the election is settled quickly and those investors exit their hedges and return to stocks.
Staying the course
While the combination of political dysfunction and volatile markets may be a recipe for anxiety, volatile periods are as much a part of investing as capital gains. Attempting to "time the market" and move in and out of stocks in anticipation of volatility that might happen is a risky approach that history says may increase the likelihood that you may not reach your long-term goals. History shows that staying invested and diversified is a better approach to confronting anxiety. The financial crisis of late 2008 and early 2009, when stocks dropped nearly 50% might have seemed a good time to run for the perceived safety of cash. But a Fidelity study of 1.5 million workplace savers found that those who stayed invested in the stock market during that time were far better off than those who headed for the sidelines.
If you get anxious when stocks drop, remember that's a normal response to volatility. It's important to stick with your long-term investment mix and to have enough growth potential to achieve your goals. If you can't tolerate the ups and downs of your portfolio, consider a less volatile mix of investments that you can stick with.
A close, delayed, or contested election is by no means certain. A decisive result is also possible, but whether the election is settled quickly or only after a lengthy legal challenge, it will be settled and the winners will take their seats in the White House and Congress. They will face the challenge of reviving an economy that is fitfully recovering from COVID-related shutdowns. They may seek to change current policies on taxes, spending, regulation, and more, the sorts of governmental issues that can impact the markets and our clients' financial wellbeing. Our investment teams closely monitor these issues and incorporate policy analysis into their decisions. As Lars Schuster, institutional portfolio manager with Fidelity's Strategic Advisers, LLC puts it, "We focus on policy, not politics."
While the causes of present uncertainty may be unique, we've been through times of turmoil before. Now, as always, the key is to stay focused on your personal goals and make sure you have a plan to get you there—no matter what life, elections, and markets may throw at you. If you need help shaping or refreshing your plans, a Fidelity advisor can help.