Market Overview

How The Stock Market May React To A Contested Election

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How The Stock Market May React To A Contested Election

There has only been one contested election since listed options have been trading – the 2000 election between George W. Bush and Al Gore. Election day was November 7th, 2000. The accompanying charts, courtesy of tradingview.com, show the pertinent time period. There had been a good rally in August, but that had been completely reversed by mid-October. Then a late October rally brought the S&P 500 back almost exactly to where it had been on July 31st – meaning that the three-month period was essentially a wash.

As soon as the election was over, it became apparent that Florida was so close that a recount was needed. That’s when the legal wrangling began: what was a valid ballot? The term “hanging chad” was introduced to most Americans. A “chad” is apparently that little rectangular piece of a punch-card that you punch out. Sometimes if you don’t completely pull it off the card, it’s still “hanging there.” Does that count? These and other issues were eventually brought to court.

The case went quickly all the way to the Supreme Court of the United States. There were actually a couple of cases. On Friday, December 1, SCOTUS ruled on a case in Palm Beach County, a heavily populated county. Their decision was favorable to Bush. I remember that they announced their decision on a Friday, between 4:00 and 4:15 pm Eastern time. In other words, the stock market was closed, but the S&P futures were still trading. In any case, the market rallied on that news, and when the final decision by SCOTUS was made on December 12 – which effectively made George W. Bush the 43rd President – the market peaked and declined into Christmas.

Also included below is a chart of the performance of the CBOE Volatility Index (which, at the time was what we now call $VXO, very similar to $VIX in absolute numbers—o you can think “modern $VIX” even though it’s the “original $VIX”). You can see that the $VXO bounced back and forth between 24 and 36 after October 1, 2000. What’s interesting is the two peaks in $VXO towards the 36 level did not occur because of the election but instead were due to stock market declines in the first half of October and the first half of December – declines that were not part of the election uncertainty at all. In fact, $VXO bottomed right on cue near the first of September and rose into October. However, it was not particularly elevated on Election Day itself. It was only when the uncertainty occurred about the winner of Florida that $VXO rose toward the 34 level – eventually declining from there after the SCOTUS decision was made.

So, this is only one case, and this year multiple states may be involved. But the general pattern is perhaps likely once again: the market declines between the end of election day and the day that the issue is decided – whether it be decided by SCOTUS or some other method (concession, for example). That’s if there is even a contested election at all. We might also say that perhaps $VIX will respond with a modest increase because of the uncertainly surrounding the election, although just like this election, that is far from certain. 

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The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

 

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