Election Suspense Is Building

Less than a month remains until the all-important first Tuesday in November. That would be election day 2020, the day where President Trump duels with former Vice President Biden at the ballot box.  Polls have been flagging toward Mr Biden, but the ULTIMATE poll is the voting machine on November 3rd. How will it end? Will there be the traditional peaceful transition of power? More importantly, how will the markets respond to the result?

As we know, markets hate uncertainty.  It is when the future is not clear that markets have a problem. Make no mistake, this election season is riddled with 'what ifs', and the media is certainly making it difficult to handicap with any clarity. As we've discussed recently, market volatility has been on the rise as the worry over a challenged election or some sort of chaos is being priced in.  

Is that fair to investors, pricing in a big move when it is unlikely to occur? How do I know it's unlikely? Let's go back to what the market hates - uncertainty. Simply put, once the election is over the result will eventually be heard. Markets seemed to have overpriced the fear of such an event and the ramifications against the market. This overpricing of fear (volatility or the VIX) has been with us for several months.  

But as we've seen for the past couple of weeks, that fear is slowing leaking out and the consequence is a higher stock market. This is not about valuation or fundamentals, rather just a condition that needs to be corrected - and it's happening slowly. This past week, we saw the markets fall sharply after midday, Tuesday's reversal down was massive to the downside as the bulls felt the rug was being pulled (a huge 'uh oh'). But the markets roared back the rest of the week and closed sharply higher, within a whisker of all-time highs.  

If the markets were truly concerned about the election and other worries (like COVID-19), would the buyers step up as they did at the end of week? Would volatility fall sharply as it did to end the week on the dead lows? We think if there is a benign response to the election in less than a month the markets may embark on a mammoth rally to end 2020 sharply higher. Of course, with the current President there is always something that could rattle the market - be it news or a tweet.