The Markets Process Jaw-Dropping Uncertainty as Election Odds Plummet and Soar

By John Banks

If you’ve ever wondered what mind-bending, jaw-dropping uncertainty looks like, this it.

The snapshot below, taken at 8:00 a.m. Eastern on Nov. 4, shows a vertigo-inducing swing in betting market odds for who will win the 2020 presidential election. 

As of election night on Nov. 3, President Trump had roared ahead in the betting odds, thanks to a strong showing in Florida, Ohio, and other key states.

But then, in the early morning on Nov. 4, former vice president Joe Biden developed a lead in the must-win state of Wisconsin, and the odds shifted wildly in his favor. By the time you read this, Biden may have solidified his lock on the presidency — or the odds may have shifted again.

Over the past 48 hours or so, the financial markets have tested out multiple combinations of possible election outcomes:

  • On Election Day itself, markets were bullish in all the areas that suggested trillions of dollars in fiscal stimulus en route for 2021, with the U.S. dollar falling and yields rising. This behavior pattern, across a wide array of instruments, strongly indicated a “Biden Sweep,” meaning an expectation that Democrats would take both the White House and the Senate.
  • As election results rolled in, Republican candidates well outperformed expectations, particularly in U.S. Senate races. This caused the overnight markets to shift toward a “gridlock” scenario, with small caps and commodity prices falling, but Nasdaq futures spiking (because large-cap tech stocks are seen as safe havens in a low-stimulus, low-growth scenario).
  • By the end of election night, it became clear President Trump was in a strong position, but Biden was still very much in contention, with yet-to-be-counted mail-in ballots in states like Pennsylvania potentially pivotal.
  • So when President Trump prematurely declared victory at about 2 a.m. Eastern, saying “frankly, we did win this election” and “we want all voting to stop,” the markets shifted to a chaos scenario, with commodity prices tanking and Russell 2000 (small cap) futures plunged more than 3.5% on the prospect of a court-litigated ballot fight or something worse.
  • A few hours after the “chaos” scenario emerged, however, markets calmed down a bit as Biden picked up a visible lead in Wisconsin and clawed his way to even in Michigan (Wisconsin and Michigan ballots are 97% and 89% counted, respectively, as of mid-morning on Nov. 4).

Hopes for a clear winner have been dashed. “Election turns into a nail-biter that may extend for days,” says The New York Times. The hope now is to avoid days turning into weeks. (That one, too, could be dashed.)

One result seems clear-cut: Democrats will not take the U.S. Senate. Mitch McConnell was reelected easily, and Republican Senate candidates did significantly better than expected in multiple states.

That in turn means that, if Biden wins the presidency by way of Wisconsin, Michigan, or Pennsylvania, a Democratic White House will face off against a Republican Senate, delivering the “gridlock” scenario in which fiscal efforts are either blocked entirely or sharply reduced in scope.

Markets are still processing what this could mean, as evidenced by ongoing wild swings in the futures markets.

As of Wednesday morning, heading into the stock market open, the U.S. dollar and precious metals and commodities are flat, while Nasdaq futures are up sharply and Russell 2000 (small cap) futures are still down sharply.

This dovetails with a low-stimulus or no-stimulus landscape, where the real economy struggles due to a lack of relief funds, large-cap tech stocks regain their bullish footing as safe havens (which fits our view of the FANG names being like zero coupon bonds), and the outcome for commodities and precious metals remains a question mark.

The drama will continue, but we can close this note with a positive observation on Bitcoin, which is above $13,800 as of this writing, having gained more than 2.3% in the past 24 hours. The institutional flows into Bitcoin are so strong now that, when it comes to globe-rattling political drama, Bitcoin is like the honey badger. It just doesn’t care.