It has cost just shy of $16 billion, led to two assassination attempts, forced the departure of a sitting president, and caused Americans to ask whether their neighbours are eating their pets. US elections are, to a British observer, absolutely bonkers.
Now with twenty-four hours to go, Kamala Harris and Donald Trump are locked in what appears to be the closest race in US electoral history. The polls are so tight that most pollsters put around a 50% probability on either outcome. That friend who confidently tells you that they know who will win - really doesn’t.
This of course leads us to fear a very tight electoral outcome. This matters, whatever your political stance, because it suggests we could enter a period of contested election results that may take weeks to resolve. This would undoubtedly be bad for markets, leaving a void into which we can expect volatility to flow. Indeed, measures of potential market volatility have risen significantly higher than in recent months. For context, though, this ‘fear gauge’ is still only around two thirds of what it was when the Ukraine-Russia war erupted or about half the level seen at the start of the Covid-19 pandemic. This suggests anxiety, rather than panic.
We have precedent for this in the 2000 election between George W. Bush and Al Gore, which came down to a few thousand votes in Florida. The election was ultimately decided by the Supreme Court but the drama rumbled on from 7 November until Gore conceded on 13 December. The US stock market lost just over 10% of its value during this period, albeit it came at a difficult time for markets generally. A rally did follow the end of the debacle although this was largely due to Gore’s willingness to accept the outcome.
Indeed, American history is littered with unlikely heroes who have sacrificed their own interests for the greater good in situations like this. Even the ultimately disgraced Richard Nixon chose to concede an election despite having knowledge of vote tampering in Illinois by the Kennedy family in order to preserve American democracy. Years later, Lyndon B Johnson believed he had evidence that Nixon had illegally intervened in the war in Vietnam to help his election campaign (although he was probably wrong) but again chose to say nothing for the greater good. We can of course speculate whether Trump would act so magnanimously and go quietly back to his golf course.
Should this scenario come to pass there is little that one can do other than wait, attempting to adjust holdings in the midst of a time-limited period of volatility is rarely a wise move. In the long-term there are some differences between Harris and Trump in terms of how portfolios could be positioned. For example, in the event of a Trump victory, particularly one that was accompanied by a Republican sweep of the House and Senate, it would be right to worry about the impact of Trump tariffs on Asia and Europe. We would be minded to consider our smaller companies exposure there. However, to understand whether this is really a structural headwind, we would need to understand the shape of Republican policymaking, and that is highly opaque at this time.
We should, however, remember that a very tight electoral result is by no means assured. Yes, the polls are suggesting a very tight race but arguably they suggest it is so tight that it is hard to believe them. We should remember that polls have margins of error, and for most of the key state polls this is somewhere between 4 and 6%. Therefore, in a tied context we would expect to see some polls coming in at 55-45, some at 54-46 and so forth, all coalescing around an average at 50-50. However, something different is happening here. Almost all the polls are coming in at about 50-50. The chances of this happening are tiny. In fact, the revered US polling analyst Nate Silver has run a model which suggests that in the most crucial state of Pennsylvania – where according to polling averages Trump has a 0.3% edge – the chance of the polls being this close together, even if the race was tied, is about 1 in 300,000. Why would this be happening? Simply because pollsters don’t want to look silly, so they are herding.
This reality is of course understood by the campaigns who worry they might not be in a tied race but that we may actually be facing a more definitive win either way. After all, a 3% swing in the actual outcome versus the polls would still be in the margin of error for polls (not a polling error) and would lead to a huge win either way in terms of the electoral college. The fear this produces is why one stray poll in Iowa this past weekend from the revered pollster Selzer Polling, which suggests Harris had a lead where previously they thought she was far behind, has led to real handwringing in the Trump camp.
Maybe the election isn’t as close as it seems? The answer will lie in a whole list of things that it is hard to measure; will more women come out than men (favouring Harris)? Is Trump really able to bring out Latino voters to support him despite recent gaffes? Are pollsters so scared of their previous mistakes that they are manipulating their models to favour Trump?
We simply do not know. However, what we do know is that when observing markets, we should consider it just as likely that we do get a definitive winner as that we get a contested election. Regardless of the winner, such an outcome would likely lead to a relief rally, though time will tell what the outcomes mean in the long-term.
For the time being, we encourage advisers to reassure anxious clients who may be concerned about a particular outcome in this election. In particular those who worry that Trump really will upend the global economic order with 20% tariffs or a threat to democracy. Ultimately, we believe that the institutions of American democracy, whilst battered and bruised from the fight, will rally themselves to ensure a more modest outcome if a Trump presidency comes to pass.