Hello, my name is James Mayer, from the Huffman Mayer Paulo Wealth Management Group of Wells Fargo Advisors. Thank you for tuning in for our September market recap.
We think it is particularly important this year for investors to prepare themselves for some post-election volatility, especially if the results of the election are unclear for many days afterwards. In any year, there's a chance of a very close election, where a few disqualified votes can change the outcome.
There are a few reasons that this contributes to uncertainty. First, there is a general trend towards Americans voting by nontraditional methods, either early in-person voting, vote by mail, or absentee. According to eac.gov, the percentage voting via one of these methods has increased in every biennial election since 2004, from a base of 20.5% in 2004, to 40.8% in the 2016 presidential election. For obvious reasons, concerns around COVID are likely to accelerate this trend. According to Pew Research, 52% of Americans expect to vote non-traditionally in 2020.
Second, counting nontraditional ballots requires more manpower and is more time consuming than counting an in-person ballot. Absentee and mail-in ballots come in an envelope. Each one has to be opened or process before it can be counted. Some jurisdiction's election officials do not believe that they have enough staff to deal with the increased number of ballots requiring processing.
Third, states have very different policies on when processing and counting of nontraditional ballots may begin. Some states, a ballot submitted early can immediately be opened and counted. In others, the envelope may be opened prior to election day but not counted until sometime on election day. This may be when polls open or when polls close. A third group of states doesn't permit ballots to be processed or counted until election day. If there is a problem with quickly determining who won the election, it is likely to come from the states where the vote is close, and counting doesn't start until election day.
To us, the most likely culprits look like Michigan, Wisconsin, Pennsylvania, and Georgia. According to Pew Research, the first three do not allow envelopes to be opened or counted until election day, and Georgia allows processing but not counting prior to election day. All four of these states are considered to be swing states by many political observers, meaning that both candidates have a decent chance of winning there, and together these four states account for 11.5% of the 538 total electoral votes.
So just how likely is a significant delay in the election results? We looked at PredictIt.org, a politically-oriented online betting platform, in order to get a clearer idea. According to them, the listed odds on September 29th, there is a 22% chance that we will know the winner on November 3rd, and a 48% chance that we will know the winner by the following day. Conversely, there is about a 40% probability that we still don't know the winner by Saturday following the election, and a 16% chance that we still don't have a clear winner by December 14th. That would be 40 days after the election.
How would the markets react to this scenario? There aren't a lot of historical examples to draw on. Most recently, during the hanging chad recount of 2000, the S&P 500 lost 4.2% between election day and December 12th, according to FactSet, when George Bush was finally declared the winner. However, that election was in the midst of the .com bear market, so it's difficult to cast all the blame on uncertain election results. We all know that the markets don't like uncertainty, but this being 2020, there's a good chance we have a little more uncertainty in store for us.
If you want to discuss this further, we're always available for a phone call or a Zoom conference. Stay safe, stay healthy, stay happy, and hopefully, we will see you soon.