What the Stock Market Did Last Time There Was a Contested Election

A contested presidential vote tops the list of investors’ fears — despite coronavirus, widespread unemployment, and the deadlock over another stimulus bill.

A recent poll of 700 investors by financial consultancy deVere Group found that 72% of respondents said a disputed election is their biggest 2020 investment worry. Those who were already worried that on Nov. 3, there won’t be a clear winner, got little comfort during the first presidential debate, as President Donald Trump again raised the possibility of challenging the vote in his face-off against Democratic challenger Joe Biden.

While 2020 has been filled with unprecedented events, a disputed presidential vote would not be among them. Twenty years ago, the nation spent 36 days in limbo wondering whether George Bush or Al Gore would be the next leader of the free world.

To understand what a contested election could mean for investors, let’s look at how markets reacted to the Bush vs. Gore showdown of 2000.

Stocks tanked, but were already having an abysmal year

The stock market doesn’t react well to uncertainty, so it’s not surprising that stocks fell in 2000 when no clear winner emerged from the election. Between Election Day on Nov. 7, 2000 and the end of November 2000, the S&P 500 fell by 8.1%. The tech-heavy Nasdaq nosedived by nearly 24%.

But let’s not forget the bigger picture: The economy was already in bear market territory after the dot-com bubble started to implode in March 2000. David Kelly, chief global strategist for JP Morgan Funds, recently wrote that the overall stock market had already dropped 6.3% from its March 2000 peak by Election Day. In fact, Nov. 7, 2000 will live in infamy not only as the day that would bring us hanging chads and Florida jokes, but also as the day Pets.com collapsed following a spectacularly terrible initial public offering (IPO) the prior February.

CNN reported at the time that the 280 stocks in the Bloomberg U.S. Internet Index had already lost $1.755 trillion of value, most of which had occurred between March and September. Still, Kelly writes that the disputed election results probably did contribute to the short-lived recession of 2001.

Due to the uncertainty, “consumer confidence fell sharply, with the University of Michigan index of consumer sentiment slumping from a very healthy 107.6 in November to 94.7 by February,” Kelly wrote. “This probably did contribute to a sharp decline in investment spending in the first quarter and a slowdown in the growth of consumer spending.”

Volatility didn’t peak until late November

The CBOE Volatility Index (VIX) gauges how much volatility investors predict in the next 30 days based on pricing in the options market. Often referred to as Wall Street’s fear index, the VIX shot up by 11.2% between Election Day and late December. But it actually peaked on Nov. 30, 2000, the day after Gore appealed to the Supreme Court, according to an analysis by investment consultant DeMarche.

While election chaos contributed to the volatility, it’s worth noting that volatility is usually higher during election years.

Gold prices rose, but not by much

Gold prices barely budged in the three weeks following the election. That’s somewhat surprising, given that investors flock to gold in times of uncertainty. It was only during late November and early December that gold prices showed a modest uptick of about 4% — right around the time that volatility was also at a high.

Stocks kept falling after the Supreme Court ruling

The Supreme Court ruled 5-4 in favor of Bush on Dec. 12 — and that day, the S&P 500 still fell by 0.65%. Even an end to election mayhem wasn’t enough to calm investors’ nerves as bad news from the tech sector abounded.

The S&P 500 continued to tumble, closing out 2000 by dropping another 3.7% from its Dec. 12 close. The picture was even bleaker for the Nasdaq Composite, which would still fall another 15% before year’s end.

The S&P 500 ended the year 15% lower than its March 2000 peak. The Nasdaq lost nearly 54% of its value from its March high. The haywire presidential election was a small blip in the wider meltdown. 

Consider that dot-com companies ran 17 ads in the 2000 Super Bowl. But by 2001, with election chaos behind us, their numbers had dwindled to three. 

What would a disputed election mean for investors in 2020?

While our current political and economic situations are far different than they were two decades ago, the big takeaway from 2000 is — yes, stocks will drop if there’s balloting turmoil. The VIX Index would probably spike, which has already occurred, and some investors would seek safe-haven investments like gold and Treasuries.

But a disputed vote would be unlikely to have a huge long-term impact or change the overall course of the stock market. The worst impact on markets typically occurs in the first four trading days after a disputed election, according to a recent report by Thomas McLoughlin, head of Americas fixed income at UBS. 

Also remember that in 2000, the election came down to 537 votes in Florida. It’s unlikely that the 2020 vote will come down to such a razor-thin margin. As Goldman Sachs economists Alex Phillips and Michael Cahill recently noted, markets will probably have enough information available from states to determine the winner quickly. “In other words, the S&P can trade the likely outcome, even if the AP does not call the race,” they wrote.

Ultimately, even if we have another contested vote, the resulting pain will be short-lived. Election uncertainty isn’t a reason to change your investment strategy. If stocks take a major plunge, it’s unlikely that the election will be the cause. In the overall picture of your portfolio’s long-term performance, you can expect the impact of not having an official election winner right away to be minuscule.

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