October 16, 2020
From now until election day, based on the evolution of the polls in 2016, we should expect the polling gap between Biden and Trump to narrow, which will add to the uncertainty.
With this in mind, we approach this very high stakes day, with stocks (S&P 500) up almost 8% for the year. That’s in-line with the long run average return on stocks – in a year of an economic shutdown and pandemic!
But this number will almost certainly change, and likely dramatically over the next four weeks.
Remember, this is what the chart of stocks looked like on the night of the 2016 election.
And you can also see how that compares to the surprise Brexit vote, that summer.
But you'll also notice, in both cases, stocks came back quickly. These sharp declines have more to do with air pockets in liquidity, rather than an abundance of sellers running for the exits. For example, the sharp decline in 2016 was in the futures market overnight (very thin markets). By the time the cash market opened, the losses were mostly recovered (and stocks finished up big on the day).
Add to this: This year, unlike 2016, the Fed is on red alert. In the Fed's view, stocks are key in maintaining confidence and stability. With that, I wouldn't be surprised to see the Fed (post-election) intervene in the stock market (if needed), to keep stocks stable-to-rising. They're already outright involved in the stock market as buyers of corporate bond ETFs.