With the US election fast approaching on November 3, we lay out guidelines for how FX investors should watch the returns. Our key points are as follows:
1. We (probably) won’t know beforehand
2. Watch Fox News, really
3. Florida is the last best hope, woe is Pennsylvania
4. Bellwethers may (or may not) work
5. Senate outcome murky
Our overall conclusion is that the earliest election results are likely to be known is by around midnight following election day or several hours after. This represents a best case scenario in which the vote in Florida (or more Republican leaning states) has gone in favor of Biden by a significant margin. Many other election scenarios entail the results not be clear for several days. The former should be positive for risk appetite, while the latter scenarios would be negative. The race for the Senate is not likely to be clear for some time, but markets may still respond to early results in Maine and elsewhere, which could be available within a day of the election.
Note that any clear-cut outcome for the Presidential election is risk positive as investors take out remaining tail risk for a drawn out tally/contested election. Shifts in Senate seats in favor of Democrats are more risk positive than Republicans retaining these seats since a changeover in Senate leadership on a Biden victory presents the path of least resistance for a significant stimulus package. It is unlikely that Democrats would take the Senate while losing the Presidency. Democrats are overwhelming favorites to consolidate control in the House.
We (probably) won’t know beforehand – With 2 weeks to go before the election, early vote totals have been eye-popping. Roughly 30mn ballots have already been returned. This represents more than 20% of total ballots cast in the 2016 Presidential election and ballots returned thus far skew heavily to Democratic voters by a ratio of about 3 to 1. However, it is difficult to extrapolate this to a victory by the Democrats, because it is unclear as of yet the extent to which these votes have simply cannibalized those which might have otherwise been cast on election day. With the President having repeatedly cast aspersions on mail in voting, it is likely that voting on election day will be done disproportionately by Republicans, as might also be the case with early in person voting which is now live in some states. This means it will be difficult to determine the result of the election simply on the basis of ballots returned. It is possible that early voting will reach such heady levels that stronger conclusions will be reached by the time of the election. However, even if turnout approaches or exceeds overall 2016 totals in some areas this may not give us a clear read since new registration and early ballot requests do not uniformly favor Democrats in all swing states even as Democrats’ numbers are greater nationally.
Watch Fox News, really – Fox News has been among the quickest networks/news agencies to call elections in recent cycles, but more importantly it is the news source that carries the most weight among the President’s right leaning base. Simply put, a call by Fox News in favor of Biden on election night or thereafter (as looks likely on the basis of current polling) is more likely to be seen as legitimate by the President’s supporters and potentially lessen the risk that national and/or local Republican legislators would seek to contest the results. Such a contested outcome could still occur, particularly if Fox were forced to retract any election call, but it would be less likely to gain widespread support and momentum in this instance. Conversely, we find it less plausible that left leaning voters will view any call as illegitimate, because overall, there appears to be somewhat greater faith in the election process and fewer outspoken calls on illegitimacy on the left. While investors appear to have reduced expectations for a risk-negative drawn out vote count or contested result, the simple act of calling the race by Fox News within hours or a day of the election should be in and of itself positive for asset prices.
Florida is the last best hope, woe is Pennsylvania – We conclude that an early return of results in Florida represents the single best ‘hope’ for the overall results to be known on election night or shortly thereafter. We consider the following factors:
1. Florida is among the most likely tipping point states ranking third according to 538’s latest projections behind Pennsylvania and Wisconsin.
2. Florida is a critical bellwether. In 270toWin’s simulations, the winner of Florida goes on to win the overall election 86.7% of the time.
3. There is some grounds for optimism results could be known within a day of the vote. Florida polls close at 21:00 ET. Following the 2020 Primary, it took only seven hours for 99% of the votes to be reported, which was among the quickest of any of the key battleground states, lagging behind only Minnesota. Albeit, this primary occurred before the pandemic. Florida has seen relatively heavy mail in vote usage in the past and this performance likewise comes down to Florida’s regulations. Mail in ballots can be counted before election day and they must be received by November 3as opposed to postmarked by the day of the election.
4. Recounts cannot be requested on a discretionary basis in Florida and are only triggered automatically if the margin of the vote is tighter than 0.5%.
A caveat, of course, is that Florida has experienced razor thin margins in the past, notably in 2000 when results were not decided for more than a month, ultimately coming down to a legal decision by the Supreme Court. In 2016, President Trump’s margin of victory was 1.2% in the state. It is possible that Florida will again come down to a ‘handful’ of votes or that litigation around the election might introduce uncertainty into the count. However, a clear cut victory by Biden in Florida would probably be among the best/earliest signals on the overall race, barring a major surprise, and markets are likely to respond accordingly. There would be very few viable paths to the Presidency for President Trump should he lose the state, while it would be somewhat less of a knockout blow for former Vice President Biden. Again, we view a Biden victory close to election night as supportive of asset markets.
On the table above, we assess all states seen as having greater than 1% likelihood to be the tipping point state and find that few other states look as likely to produce a clear cut result on election night as Florida. Indeed, one has to drop all the way down the list to NH before one finds a state with a similar mix of attributes. The likelihood that New Hampshire is the tipping point state is only 1.2%, however it scores 89.2% as a bellwether and results are likely to be returned in relatively short order. Following the (pre-pandemic) NH primary, 99% of votes were reported within 24 hours of the election, votes are tallied before the election date and must be received by November 3rd. The margin in New Hampshire in 2016 was vanishingly small at 0.3% and a recount could be requested.
The bigger caveat in assessing precedents on time until election results are known is that the 2020 election is breaking new ground. There is much heavier reliance on mail in voting than has been the case in the past amid the pandemic. Very few states have experience in this regard and the time it took to reach full reporting in pandemic affected primaries where turnout is likely to be orders of magnitude lower gives cause for worry.
Indeed, there is little likelihood that the results from the two most likely tipping point states will be known for some time after the election date. Pennsylvania is the single most likely state to represent a tipping point, while Michigan is the second most likely. In both cases, local regulations will serve to slow down reporting. In both states, tallying of mail in votes begins only on election day. In Pennsylvania, votes must be postmarked rather than received by election day and recounts are a possibility in both instances. The experience following pandemic affected primaries in both states was that it took a long period for 99% of results to be reported. It took 145 hours from polls closing in Pennsylvania and 151 hours from polls closing in Wisconsin.
This does not rule out a quicker resolution at present, particularly on a much larger than expected Biden landslide victory, but if the election is seen as coming down to these states, it will serve as a drag on market risk sentiment since it would increase the risk for a drawn out and contested vote count.
Bellwethers may (or may not) work – We identify two bellwether counties that have historically been good predictors of the overall results in the Presidential race and stand a fighting chance of reporting results relatively quickly in the wake of polls closing. Of course, it is hard to assess the potential impact of shifting demographics and patterns in turnout compared to previous elections, but we try to control for these variables by only considering counties that saw less than a 10% swing in either direction in House votes from 2016 to 2018. Given idiosyncrasies associated with individual House races this may be an imperfect measure, but at the very least these counties do not appear to have experienced wholesale changes in voting patterns over the past several years. Overall, there will be some skepticism in trading bellwethers, but should a number move in favor of Biden, this could lend support to risk appetite on or around election night.
1. Valencia County, New Mexico – The track record for Valencia in aligning with the winner of the electoral college has been perfect since 1952 which represents the longest unbroken streak for any US county. New Mexico was able to tally 99% of votes in its 2020 primary in less than 4 days after polls closed even after the onset of the pandemic. New Mexico begins counting mail in ballots before election day and ballots must be received by November 3 to count. Combined this means the shape of the race may be clear relatively early, if not in the immediate hours after polls close at 21:00 ET. 2016 to 2018 saw a 7% drift in favor of the Republican House candidate, bucking the national trend towards Democrats.
2. Coos County, New Hampshire – Coos County has missed only twice since 1892 (1968 and 2004). New Hampshire was able to tally 99% of the vote within 24 hours of its pre-pandemic primary in 2020. It begins counting ballots before the day of the election and ballots must be received by November 3. Partisan drift in Congressional voting from 2016 to 2018 was 7.3% in favor of the Democratic candidate.
Senate outcome murky – If we expand our analysis on potential ‘early’ reporting of results to Senate races, we find that the outcome in terms of control of the Senate is not likely to be known until some time after the election. We consider competitive Senate races in the aforementioned tipping point states, as well as the next three most competitive races in non-tipping point states. There are reasons to be cautious on the likelihood that any of the results are known in short order after polls close. Results in Michigan, North Carolina, Texas and Iowa could be slowed by the fact that ballots can be postmarked by election date but received afterwards. Arizona, Georgia and Colorado all took 120 hours or longer from polls being closed to report results following their primaries. Note we leave out the Alabama race where in all likelihood, Democrat Doug Jones will lose his seat. Remember, Democrats must net a gain of 4 seats to take control alongside a Biden presidency.
Of the seats that look most likely to flip to Democrats, results from Maine could be known earliest. Maine polls close at 20:00, the state returned the bulk of votes within 21 hours of polls closing following the primary, mail in ballots can be tallied ahead of election day and they must be received by November 3. Currently, 538’s projection for the Maine Senate race gives Democratic challenger Sarah Gideon a 63 percent chance of unseating the Republican incumbent, Susan Collins.
This would of course provide only limited insight into the overall shape of the Senate race. Nevertheless, it could provide a degree of support to risk assets given that phase 4 stimulus expectations are seen to increasingly hinge on whether or not there is a blue tsunami. Should Democrats gain control of the Senate in addition to the Presidency it would prevent the path of least resistance to a large stimulus package being signed into law in the months ahead.