There are now 19 days to the election and we are no closer to figuring out who will win. The recent national polls are pointing to a Biden win, but a President is elected by electoral votes, not popular votes. In 2016 Hillary Clinton won the popular vote (as predicted by national polls) with 48.2% of the vote, versus Trump’s 46.1% share. Several key battleground states are too close to call or appear to be setting up for a Trump win.
As a stock market traders and market analysts, we are trying to make sense of the election’s stock market. Nearly every election, we go through the uncertainty of how the markets will react to the election results. Our goal for this article is not to tell you who to vote for, but rather an unbiased view of what the stock market will do along with some sector winners and losers.
However, the 2020 presidential election is the most uncertain in both who will and how the stock market will react. As a result, it comes as no surprise that a US Presidential Election creates increased market volatility across all asset classes.
Indications are strong that the 2020 presidential election is sending more significant shockwaves through the markets than has been seen previously in 2016 or 2012. There is a considerable amount of risk as there is potential for gain in our current environment. Navigating the stock markets will be like dancing on ice. There are a few things investors can do to minimize the risk or make some plays.
- 1 Battleground States Polling Signal Trump Repeat Win?
- 2 Polls Issues – Why the Data is Skewed
- 3 Why is This Election Year A Higher Risk?
- 4 What to Watch Before Election Day in the Stock Market?
- 5 What Tools Should Investors Use to Watch Market Volatility?
- 6 Who Will Win The 2020 Presidential Election and How will the Stock Market React?
- 7 What Should Investors do if President Trump Wins?
- 8 What Should Investors Do If Biden Wins?
Battleground States Polling Signal Trump Repeat Win?
As market analysts, we try and make sense of data and are trying to do the same thing here. As mentioned above, both Presidential candidates must win key states for Electoral College votes. The critical states to watch are Michigan, Wisconsin, Florida, North Carolina, and Arizona. Florida is our opinion the most critical state for Trump to win. A loss in Florida will make it very challenging for Trump to win enough seats.
Although the polling data is not transparent and possibly skewed, a good place to look is Real Clear Politics’ Battle Ground Polls 2020-2016.
The recent poll (shown below) shows that Trump is 0.2 AHEAD of where he was with Clinton in 2016 at this time. We fully expect the election to narrow to 3-4% as early as this weekend. The markets and likely the country will start to show uncertainty. Investors and traders may want to wind down trades this week before the election.
Polls Issues – Why the Data is Skewed
Polls are generally a good tool in an election are trending indicators and will point to the winner. However, the last election proved that we can’t believe them, or can we. There is a lot riding on the election regarding taxes and the economy. Many readers have requested our view on the polls and why or why not they mean in anything.
I have been looking for detailed data results on 2020 Presidential polls that are being released almost every day. All of the polling organizations I have contacted embargo their data for up to 12-months. It is a right that they enjoy for being part of something called the “Transparency Initiative.”
However, recently I have found a “partial” dataset for the Washington Post / ABC Poll released on August 17, 2020 with data accumulated between August 13 and August 15, 2020.
The data on who respondents were “supporting” in the 2020 Presidential election was NOT part of the Roper Report that was made public about this survey and which is the foundational source of what is discussed below. Among the data that is excluded from these results are the answers to the question – “If the presidential election were being held today and the candidates were (Donald Trump and Mike Pence, the Republicans) and (Joe Biden and Kamala [COMMA-la] Harris, the Democrats), for whom would you vote?”
On August 17, 2020, this Post article and ABC News reported that, “Former vice president Joe Biden leads President Trump in the presidential contest by 12 points, according to a new Washington Post-ABC News poll released Monday!” (53% Biden and 41% Trump)
Based on the results presented herein and analyzed below, it is my view that the actual results are:
Biden-Harris = 49%
Trump-Pence = 47%
This is well within the stated error rate of 3.5%.
Poll Data Analysis
The “raw data” released had only “partial” responses from all 1,001 respondents including
- The detailed data shows 1,001 Respondents broken down as followed based on questions asked in the survey:
- 476 Democrat/Lean Democrat (47%)
- 435 Republican/Lean Republican (43%)
- 72 Independents/Lean Independents (7%)
- 22 – Other (3%)
- 5% response advantage for Democrats.
- “Reluctant” mobile phone respondents were offered a payment of $10 to participate.
- Paid polling respondents produce biased polling results when all respondents are also not paid
- The fact that respondents were offered payment to respond (as well as how many took payment) was NOT disclosed in the Post articles about the Posts or ABC’s commentary and reporting of them.
- Even if only 10-people took payment, on a 1,000 person poll it could effect total results by 1% (or more) net and 2% gross (+1% for one candidate or issue, -1% for another)
- Every respondent in this survey has a 0.10% effect on overall results.
- The survey provided a “statistical weighting” of each respondent to the survey. This showed that:
- Each Democrat/Lean Democrat was afforded an “average” weighting of 1.03
- Each Republican/Lean Republican was afforded a “average” weighting of 0.95
- Total Weighting Bias afforded Democrat/Lean Democrat was 8% (1.03/0.95 = 1.08% or 8% Bias to Democrat/Lean Democrat respondents).
- The actual amount may be more depending on the state the respondent was from.
The data outlined above provides for some “reasonable” extrapolations:
- There is an 8% weighting Bias in favor or Democrat/Lean Democrat (+3% (plus) for Biden -5% (minus) for Trump)
- If we take 3% of the total vote away from Biden to account for the weighting bias this would result in a 50% total for Biden in the raw responses received.
- This translates to 500 respondent supporters for Biden
- If we add 5% of the total vote to President Trump to account for the weighting bias this would result in a 46% total for Trump in the raw responses received.
- This translates to 460 respondents supporting Trump
Items to note:
- Since the Washington Post and ABC “embargo” their data for up to 12-months on the “head to head” vote total we do not know all of the facts.
- A 12-month embargo on data as important as this is telling for an organization that has a slogan “Democracy Dies in Darkness.”
- It is very possible that there are crossover votes from the those in the study that are identified as Democrat/Lean Democrat or Republican/Lean Republican that vote for the other party’s candidate:
- Based on Trump victories in 2016 in Pennsylvania, Wisconsin and Michigan, it is very reasonable to give the advantage to President Trump in this area and using the “assumed” weighting formulas applied in this study (1.03 and 0.95).
- Even if there were just an equal number of crossover votes, this would produce an additional increase in raw data support for each candidate as follows:
- Every Democrat/Lean Democrat would have an average 1.03 weighted effect as a total positive for Trump
- Every Republican/Lean Republican would have an average 0.95 weighted effect as a total for Biden (an actual negative impact)
- Assume that 10% of 476 Democrat/Lean Democrat respondents cross over and vote for Trump
- This would be 48 respondents with an impact of 1.03 or an effect on the total votes case of 49 more supporters for Trump (48 x 1.03 = 49)
- Assume that 10% of the 435 Republican/Lean Republican respondents cross over and vote for Biden:
- This would be 44 respondents with an impact of 0.95 or an effect on the total votes case of 42 more supporters for Biden (44 x 0.95 = 42)
- This will produce a 7 vote correction to Trump even with an equal 10% Crossover vote (49 – 42 = 7 vote advantage for Trump).
Every respondent in this survey has an impact of 0.10% on the total, therefore if we take 7 voters from Biden and give them to Trump due to the crossover analysis above this results in a total of:
- 493 raw respondents for Biden (49% total support)
- 467 raw respondents for Trump (47% total support)
Therefore instead of a 12% difference, the actual difference in this poll could be as little as 2% which puts it well within the reported margin of error of 3.5%. If the crossover vote for Trump was higher the results would be even closer.
Assuming that they use the same methodology, and unless the Washington Post/ABC decide to release all of their raw data results, as of today I will be making the following adjustments to any Washington Post / ABC poll that I see between now and Election Day:
- Reduce 4% from the total that the Washington Post/ABC report for Biden-Harris
- For example, reduce 54% to 49%
- Add 6% to the total that the Washington Post/ABC report for Trump-Pence
- For example, increase 41% to 47%
Life would be better for all of us if all pollsters released their raw data in total (something like this “partial” Roper Report) with every poll that they print, publish or discuss. Here’s to hoping them to do just that. It would be a great way to prove me and other skeptics wrong!
Remember, the only poll that counts is the votes that are totaled on Election Day.
Why is This Election Year A Higher Risk?
It is thought that the increased risk associated with this election is not the outcome but more the very real possibility of a significantly delayed result. It is to be expected that a growing number of legal challenges could make any transition of power a difficult one, with 154 filings across 41 states already aimed at contesting balloting changes. With all possibilities still on the table, ranging from a clear win for either opponent to an outright refusal to accept the election result, it is becoming clear that uncertainly is the only certainty.
Adding to the market volatility this year is the economic uncertainly induced by the coronavirus pandemic, leaving the US in recession. To add to the current administration’s woes is the increasing skepticism surrounding the feasibility of mail-in voting, with the President himself denouncing the possibility of clear-cut results come November. Typically, with any presidential election comes the policy face-off that aims to dominate the fight on all aspects of recovery, from tax to foreign trade.
If the volatility in the build-up to an election seems concerning, this pales in comparison to Election Day itself.
What to Watch Before Election Day in the Stock Market?
If you are like me, you are already sick of the political ads. Unfortunately, it will like to get worse. We are expecting massive dips as the election gets closer whoever is ahead in the polls. The uncertainty on election day and the following days, if there is not a clear winner, will cause a massive drop that could lead to a crash.
Investors should know one thing – the stock market hates uncertainty. A clear winner will calm the stock market. Uncertainty will crash the stock markets.
What Tools Should Investors Use to Watch Market Volatility?
An excellent tool to watch is VIX. One indicator of this is the increase in the hedging of investments to offset the risk this uncertainty brings to a portfolio. The Chicago Board Options Exchange created the Volatility Index (VIX), which is specifically designed to represent market volatility on a 30-day expected forward trend. This is currently predicting a VIX that is 3 volatility points higher than the same period before previous presidential elections. Analysts at Bloomberg advise that traders should be prepared to play the long game beyond November 4th; while there may be peak volatility on Election Day itself, it will by no means be the end of uncertainly in the markets.
For many, this has been something to be expected, and analysts have been reporting increased levels of hedging since January. This effect is also evident across the currency markets, as evidenced in the dollar-yen spread this month, reaching the highest implied volatility since November 1999. What this means on the world stage is that a fall in the USD often translates to a rise in the Euro, currently tracking at a 5% rise over the previous few months.
Investment Analysts at Wells Fargo demonstrated that the expected price volatility of markets on Election Day had quadrupled this year compared to a peak of 2 times in the previous two elections.
The anticipation surrounding the outcome of November’s vote plays a kept role in the volatility of markets in the run-up to the election. Recent nationwide polling has Trump leading Biden polling results in key states. However, Biden was AHEAD 7 points just a few weeks ago.
A Volatility Risk Premium is the level of protection an investor can leverage to mitigate against unexpected spikes in volatility. Here we can expect VRP to peak on Election Day and maintain heightened levels in the result’s immediate aftermath. VRP could be considerably higher should we see the democratic candidate win, and even more so should the democrats land large gains in both the House and Congress.
Who Will Win The 2020 Presidential Election and How will the Stock Market React?
Please note that Alphabetastock’s market analysis of the situation is unbiased and based on the research of the candidates’ policy and past market reaction. The short answer is that according to our analysis and JP Morgan, President Trump is expected to win if you look at market pricing, and the stock market should remain flat or go up after the election. The polls are dead even, with a slight edge now to President Trump in key states. That being said, the polls could change very fast, and Biden could win. If Biden wins, we are expecting a dramatic drop in the stock market.
What Should Investors do if President Trump Wins?
As stated earlier, the current polls and market pricing suggest that President Trump will win the current election. There is not a strong indication that anything will change in terms of the Democrats controlling the House or gaining the Senate. Thus we will continue to see the same mixed party control of the Federal Government. The markets have historically favored this type of political division.
The two biggest threats to the market if Trump wins are: Federal Government Spending and Tax Increases.
The first and current threat to investors if Trump wins is the out of control spending by the Federal Government. This will eventually catch up to us. President Trump has not been a “fiscal conservative,” and it only was made worse by a Democrat lead house. Our current national debt is 26.7 trillion dollars. Fast forward four years and our national debt is projected to be over 46 trillion dollars or 174% GPP!
The second threat to investors if Trump wins is taxes, which will come as a result of the recent spending. President Trump has stated multiple times he is against raising taxes and pushed through the largest tax cut in recent history. Unfortunately, Trump has not been able to CUT spending. It is expected that Congress will try to pass some kind of tax to try and tackle the national debt.
Our Top Picks For A Trump Win: Gold, Silver, Consumer Staples, Tech, Materials, Health Care, and Energy.
Our Top Losers For A Trump Win: Real Estate
What Should Investors Do If Biden Wins?
If Biden wins the Presidential Election, we see the stock market react unfavorably to it because of his and political party’s stated policies. Biden has been historically a moderate Democrat, but the party itself has become more liberal socialist in recent years. Hardcore liberals like House Speaker Nancy Pelosi have had to fend off attacks from liberals as being not liberal enough.
The primary threats we see are three; Tax Increases, Medicare For All, and Increased Spending.
First, the rollback of corporate tax cuts and tax increases will cause a market drop and possible depression. This will affect all market sectors and will directly reduce earnings, dividends, and lead to layoffs.
The Second Market threat is Medicare For All. We will expect insurance companies and pharmaceuticals to be hurt the worse. It is unknown if hospitals and medical device companies will be hurt by a Medicare For All plan.
Lastly, we predict increased spending on social programs by the Federal Government that will only make the situation worse by a full-blown Keynesian economic policy. This will likely be followed or combined with a tax increase.
Our Top Picks For An Biden Win: Gold, Silver, Tech & Defense.
Our Top Losers For A Biden Win: Consumer Discretionary, Real Estate, Financials & Health Care