The debate last night served as a window into the sad state of American politics. Enough said on that front…

 

In a continuation of yesterday’s note, we look at the worst case scenario of no clear winner on election day:

 

The “Ugly”: No Clear Winner Emerges on Election Day and the Election is Contested. The concern over this outcome stems from an expected historic number of mail-in ballots in multiple states, due to fears of contracting COVID-19 at polling places. The number of mail-in ballots could be so large that they 1) Prevent a state from being called for one candidate or the other, or 2) “Flip” a state that had previously been called once all the mail-in ballots had been processed.

 

Focus in the media lately has been on Trump’s refusal to explicitly say he’ll facilitate a peaceful transfer of power, but the real risk for markets is that we don’t know the election outcome until mid-December. Other than creating confusion over future policy expectations, an election drama will likely consume Washington and prevent stimulus from being passed, potentially pushing back that legislation into early 2021, or until the new Congress and president are seated.

 

Likely Market Reaction: “Risk off.” While markets know a contested election is ultimately a temporary phenomenon, that won’t stop the knee-jerk selling.

 

Dates to Consider: The most important date to know is December 8, because that is the day when states must resolve any election disputes. December 14: Electors in the Electoral College cast their ballots for the presidency. January 6, 2021: Congress counts the electoral votes and a winner is declared. From a reference standpoint, the Bush vs. Gore drama ended on December 11 with the Supreme Court ruling that Florida’s 25 electoral votes should remain with Bush, effectively delivering the presidency.

 

What’s the Probability of a Contested Election? Perhaps this is optimistic, but the probability of a contested election is likely much lower than the slowly building media hysteria would imply. Here’s why.

If the election is going to be close, it’ll come down to the results of a handful of swing states: Florida, Wisconsin, North Carolina, Michigan, Pennsylvania and Ohio.

 

Of those six states, four (Pennsylvania, Wisconsin, Florida and Michigan) have Election Day deadlines for all mail -in ballots. So, there likely won’t be a “wave” of mail-in ballots that would cause any major surprises in those states.

However, North Carolina and Ohio allow mail in ballots to be received three and 10 days after the election, respectively. So, there is the potential for a reversal days after November 3. But in order for that reversal to occur, the election results would have to be very, very close.

I researched the levels that cause mandatory recounts in most of the swing states mentioned above, and in order for there to be a recount where the mail-in ballots would be contested, the margin of victory needs to be less than one half of one percent (or 0.50%).

 

For 2016, only two states fell within that threshold, Michigan (0.3%) and New Hampshire (0.4%). Most results, even in battleground states, saw a margin of over 1%.

Here’s the point, most elections can’t be challenged (at least not legitimately) unless there’s a recount. In order for there to be a recount, the margin will have to be less than 0.5% in most of the swing states. And, those swing states will need to represent enough votes to turn the election. That’s not impossible, but it’s very unlikely, and simply not a high probability event. But that being said, it’s 2020, so anything is possible!