Lack of presidential outcome leads to market uncertainty.
With visions of hanging chads dancing in my head as I fell asleep last night, I woke up this morning and reminded myself that markets don’t like uncertainty. And with no decision in the U.S. presidential election overnight, near-term uncertainty may cause some market weakness, although we remain bullish on 2021 regardless of the outcome of the presidential election.
While we now strap in for what could be days or even weeks of uncertainty and volatility, our medium-term outlook remains constructive, as expressed by our equity overweight and tilt towards value cyclicals and small caps.
Our plan remains to use weakness to add to our positions, given our view that now is the point of maximum uncertainty. By inauguration day, Jan. 20, 2021, we will certainly have a president with less political uncertainty in front of us than behind us. On that date, we also expect to have stimulus in place or on the way, a Fed that is still not thinking about thinking about raising rates, further development of Covid-19 treatments and vaccines and some of the easiest year-over-year economic and corporate earnings comparisons on record.
President Trump survived the night, with needed victories in Florida, Ohio and Iowa. Similarly, Vice President Biden had key wins in Arizona and Minnesota. The outcome, however, is still very much uncertain, with both sides clinging to a narrow path to victory that runs through a series of states that have yet to count all of the votes including Georgia, North Carolina, Pennsylvania, Michigan, Wisconsin and Nevada. Currently, the President has a lead in the enough states to give him an electoral college victory, but that could change once outstanding mail-in ballots are counted. That process may not be completed for days, and legal challenges that could last for weeks are increasingly likely. In the event of a legally contested election, here are some key milestones in the process that we are watching:
- Before Dec. 8, states must certify their election results ahead of the meeting of the Electoral College on Dec. 14.
- Between Election Day and Dec. 14, a state could approve switching to a method other than the popular vote to select electors. This would require passage in the state legislature and sign-off by the governor. This would certainly be challenged in the courts.
- The GOP currently controls 28 state legislatures accounting for 302 electoral votes, vs. the Dem’s 22 states and 220 electoral votes. But of eight states with GOP legislatures and Democratic governors, five (Mich., Mont., N.C., Pa. and Wis.) don’t have veto-proof overrides.
- The Electoral College vote is scheduled to be counted by a joint session of the incoming Congress on Jan. 6, 2021, with the vice president presiding.
- If neither candidate reaches a 270 majority, the election goes to the incoming House, with each state getting 1 vote. Currently, there are 26 states with a Republican delegation, 23 states with a Democrat delegation and one state (Pennsylvania) with an evenly split House delegation.
- The vice president will be chosen by the Senate, with each senator receiving one vote. Therefore, you could have a president of one party and a vice president from another.
- If the House fails to choose a president, but the Senate chooses a vice president-elect, that person serves as acting president until a president is selected.
- If neither a president nor vice president is chosen, the House speaker becomes acting president until the election is resolved.
We will vigilantly watch these election milestones and mind all developments on the virus front and continue to think our plan to buy on weakness is the right approach.