Trump stokes a new threat to Wall Street: Election chaos
September 24, 2020
Wall Street can deal with whoever wins the presidential election this fall. What investors can’t stomach — and are increasingly nervous about — is a rapid descent into banana republic-style chaos, in which the result is either unclear for months or President Donald Trump loses but refuses to leave office.
The fears kicked up to a higher level this week after Trump said he would not necessarily commit to a peaceful transition should he lose on Nov. 3. “We’re going to have to see what happens,” the president said about handing over power. “You know, I’ve been complaining about the ballots and the ballots are a disaster.”
They were Trump’s sharpest comments to date about contesting the election, coming just as Americans start voting and less than six weeks before Election Day. Though Trump has repeatedly complained about the potential for widespread voter fraud — despite multiple studies suggesting such fraud is extremely rare — his latest warning came against a backdrop of rising angst nationwide about a polarizing fall.
Trump’s aggressive chatter now runs the risk of damaging what he sees as one of his greatest achievements: a lofty stock market.
The rising uncertainty about a post-Election Day fight is already spurring increasingly aggressive bets on Wall Street for a surge in volatility in the coming weeks. Major stock indices have lost close to 10 percent since hitting Covid-era peaks at the start of September. The declines in recent weeks followed signs of softening in the economic recovery as well as fear of further deterioration without fresh economic aid from Capitol Hill.
Congress appears no closer to renewing expanded jobless benefits, small business assistance or injecting fresh cash directly into the hands of millions of Americans, though House lawmakers are set to make another attempt. The failure comes as initial jobless claims continue to hover around 1 million per week and 26 million Americans remain dependent on some sort of unemployment assistance.
Against that shaky backdrop, Wall Street analysts are increasingly bracing for a chaotic Election Day and a bitter battle to follow that could feature protests and even violence in the streets. The unrest could make it impossible for investors to make new market bets based on the kinds of policies that might go into effect next year, and could even exacerbate concerns about the economy sliding backward with the coronavirus pandemic still wreaking havoc on consumers and businesses.
“There are a lot of factors pressuring the stock market right now and the potential for a hotly contested result is certainly one of them, especially as we are now inside 40 days til the election and we are in a time where there is already so much social tension,” said Mark Luschini, chief investment strategist at Janney. “This does have the potential to incite the kinds of protests we’ve seen and the metastasizing of social unrest. And investors would be more inclined to sell first and ask questions later.”
An unknown election result is increasingly becoming conventional wisdom on Wall Street. “A contested election has become the baseline,” JPMorgan Chase strategist John Normand wrote in a recent note to clients.
The United States has seen bitterly disputed presidential election results in the past. In 2000, it took weeks to decide the race between George W. Bush and Al Gore. Legal battles raged over the recount in Florida with the Supreme Court finally weighing in to stop the recount and award the election to Bush. Stocks slid throughout that period.
But 2020 is a vastly different and more combustible environment, sparking growing unease among investors about the impact of a muddled election result. Protests have already raged in major cities over police violence. And Trump supporters and opponents have engaged in sometimes violent clashes in recent weeks. Trump regularly advocates violence against journalists at his rollicking campaign rallies.
The U.S. also continues to face a brutal pandemic that has killed more than 200,000 Americans and spurred a massive economic decline. While the backdrop in 2000 came amid a dot-com stock bubble in the process of deflating, the economy was still expanding.
Today’s far more unsettled environment — for markets, the economy and the political system — risks exploding in unpredictable ways.
“The fear is that if we get a disputed election, it could lead to disruption and possibly even violence. If so, we could well see markets take a significant hit,” Brad McMillan, chief investment officer at Commonwealth Financial Network, said in a note to clients. “In 2000, the hanging chad debacle in Florida hit markets, and this election could well be even more disputed than that one.”
In addition to sowing doubt about whether he would accept the election result, Trump has suggested he needs to fill the late Supreme Court Justice Ruth Bader Ginsburg’s seat right away so the high court would be more likely to rule in his favor in a disputed election. The positioning has enraged the left and potentially increased the chances for violent clashes after Nov. 3 if the Supreme Court does in fact have to settle the results.
Some investors would certainly benefit from the chaos of a disputed election, including traders who make their money off market volatility. Wall Street trading desks that depend on heavy volume and large transactions could also see revenues spike. But for the broad swath of American investors who mostly have money in the market through retirement plans, it could lead to panic and a desire to move money into safer assets, possibly driving stock prices down even further.
A rapidly declining stock market generally translates fairly quickly into reduced consumer confidence. That could lead to slower spending — especially amid a pandemic — that can then snowball into a more significant pullback in the broader economy.
Volatility is already spiking on Wall Street as the potential for an ugly election result grows. The CBOE volatility index, commonly known an as the VIX, is near two-week highs and expected to continue to rise as the election approaches.
Most Wall Street executives, traders and investment analysts widely expect the market environment to calm quickly after the election if the result is clear.
Markets could rally on a Trump win based on the expectation of continued low tax rates and a relaxed approach to corporate regulation. A Biden win, especially if Democrats also take the Senate, could spark a short-term sell-off on fears of increased taxes on corporations and the wealthy — though that possibility is increasingly baked into expectations. Certain sectors likely to face new regulation, including banks and the energy industry, could also suffer.
But there is little belief on Wall Street that a Biden win would crush stocks for a longer stretch, as Trump has suggested, particularly given the extreme efforts by the Federal Reserve to boost the recovery. Despite the leftward tilt of the Democratic Party, Biden is not viewed as a radical who would try to fundamentally reshape the economy. He has not supported Medicare for All or backed a broad wealth tax or the Green New Deal.
A Biden win could also reduce some of the tension generated by Trump’s trade wars and generally produce a less volatile and noisy daily political environment, tempering any initial sell-off. Total Democratic control would also likely lead to significant new fiscal stimulus, generally viewed as a positive on Wall Street.
“A Democratic sweep might stir some knee-jerk reaction over higher corporate and individual tax rates and more regulation,” Luschini said. “But that would probably be largely worked through and forgiven as investors care more about the economy than politics.”
But the fear that is growing more intense by the day is that markets will have no idea — perhaps for weeks or months — about who will get inaugurated next Jan. 20. And the potential for real violence to spill out into American communities is no longer treated as a fanciful worry.
Markets recovered a bit on Thursday partly on renewed hopes for an aid package, amid reassurances from senior Republicans that Trump would not really try and hold on to power if he clearly loses in November. But that has not eliminated concern that the election result may remain in doubt for weeks.
“It’s a real fear — and one that, in many respects, I share,” McMillan said in his client note. “From a political standpoint, unless there is a blowout win by one side or the other, we are almost certain to get litigation and an unresolved election. A substantial market reaction would be quite possible.”
Source: https://www.politico.com/
