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RISK ON

Traders are positioned for a clear US election outcome

Reuters/Kai Pfaffenbach
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  • John Detrixhe
By John Detrixhe

Future of finance reporter

As Americans vote in record numbers to choose the next US president, they might be braced for a contested election that drags on for weeks. But professional traders, for the most part, are positioned for a clear outcome.

The VIX volatility index, also called the “fear gauge,” has declined for the past two days as a wide range of polls signal Democratic candidate Joe Biden leads the race. The Cboe benchmark measures expectations for price swings in the S&P 500 index during the next 30 days and is seen as proxy of anxiety among investors. Stock markets from Paris to Frankfurt have also rallied for a second day, and futures linked to the S&P 500 index of large US companies climbed about 1.2% today. Oil and gold surged. The markets’ gyrations signal traders think the odds of a contested election are overblown, and that there’s a path toward renewed US government stimulus to support the economy.

Of course, many traders were betting on a clear outcome in 2016 when Donald Trump surprised investors by taking key US states to beat Hillary Clinton.

They got a decisive winner back then but this time around, Democrats and Republicans have armies of lawyers standing by to go to court over any voter issues that may emerge, and Trump has said his team already plans to challenge the outcome in Pennsylvania, a key battleground state once again.

The surge in mail-in ballots could also result in a longer delay for the final tally to be known. And the presidential race could be further complicated if mail-in voting results in a higher-than-normal number of invalidated ballots that are contested in court.

Despite those concerns, traders appear to be looking at the polls, which indicate a Biden win. Trump has about a 10% chance of winning, according to Nate Silver, a statistics guru and founder of the FiveThirtyEight website. While Biden’s standing is stronger in the polls than Clinton’s was four years ago, the race could still be a nail-biter, and it’s entirely possible that the current US president will be in office for another four years.

Should either candidate secure a clear outcome, it would remove the uncertainty that’s been hanging over businesses in recent months and, depending on which parties are in power in Washington in 2021, could clear the way for $1 trillion or more of government support for the economy. While a Biden victory would potentially result in higher taxes for corporations and the wealthy, that could be offset by heavy infrastructure spending and investment in clean energy, should he be able to get his plans through Congress.

While traders appear somewhat confident about a straightforward outcome, businesses and retailers around the country seem less so, and are bracing for election unrest. In earnings calls this week, the potential for election turmoil and social unrest has been top of mind for some executives and analysts.

As PayPal CEO Daniel Schulman said in an earnings call yesterday, the outlook for the economy remains highly uncertain, making it difficult to provide precise projections for earnings and revenue amid a continuing pandemic. “What is consumer confidence is going to look like, what’s the economy due to stimulus payments, what’s the holiday shopping season going to look like?” he said in a call with analysts. “We’ve got an election coming up tomorrow, potential social unrest.”

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