While today’s situation is unique, it’s not entirely unexpected. We knew heading into Election Day that a surge of mail-in voting increased the chances that no winner would be declared on Tuesday. According to the New York Times, 22 states and the District of Columbia allow postmarked ballots to arrive after Election Day, meaning the timing of finalized election results depends in part on when voters return their ballots.
Markets will tolerate the uncertainty in the short term, as long as it appears we’re moving toward a final decision. However, the markets will be less welcoming if the election turns into a protracted legal battle. Volatility erupted when the US presidential race between Al Gore and George W. Bush in 2000 resulted in no clear winner. Stocks fell as the contested election dragged on through the month. By the end of November, the S&P 500® had declined by nearly 10%, while the NASDAQ plummeted 19%. Investors sought defensive sectors and asset classes such as consumer staples and gold, and sectors expected to benefit under a Republication administration, such as energy, rallied.
We may be facing more of the same. Heading into this presidential election, the Cboe Volatility Index (VIX) indicated that investors expected volatility would surge substantially in Q4 compared with Q3. This murky Election Day result could make that vision a reality.