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It’s the day after election day in the United States and all signs point toward a long, protracted vote-counting process and successive court challenges launched by the incumbent government.
News of a contested election that will take days, if not weeks, to settle has led to wild premarket trading in the fallout from November 3rd. From green to red, and now back to green again.
Dow futures and S&P 500 futures, bellwethers of investor confidence, surged when President Trump took a late-night lead in key battleground states such as Wisconsin, Michigan, and Pennsylvania. These gains quickly evaporated when he preemptively declared victory in an early morning address. The President’s remarks were met by swift condemnation across the political aisle, including from rank and file members of his own party, such as Adam Kinzinger (R-Ill.) and former Sen. Rick Santorum (R-Pa.).
At the time of writing, the election remains uncalled and lawsuits have already been filed in Wisconsin and Pennsylvania where mail-in votes and absentee ballots abound.
Where does this leave you and your retirement portfolio, and what can we expect from the markets in the weeks ahead? Although this is a political moment without precedent, it’s not without a financial precedent. Let’s take a look at the data, and how various political outcomes might affect economic scenarios in the near-term.
The Post-Election Rally: Here to Stay?
Elections have a paradoxical effect on financial markets. One of the rules of investing is that markets abhor uncertainty. The higher the degree of uncertainty, the lower the degree of confidence the public has in the profitability of their investment. Fear of the unknown creates downward price pressure on assets such as stocks.
The paradox lies in the certainty-defining nature of elections. In their aftermath, elections put to rest weeks or months of uncertainty and give the investing public a good idea of what policy environment they will face for the next two years until the subsequent election cycle. Based on the logic of the market, we would expect the clarity of election results to put upward pressure on financial markets. But historically we’ve seen the opposite effect.
Source: MarketWatch
U.S. equities, represented by the Dow Jones, have seen an average decline of -0.9% on the day after an election since 1928. As depicted by the chart above, the five largest declines have taken place following the election of a Democratic candidate. If the trend holds true, we may see a dip in the equities markets if the election is called for Democratic nominee Joe Biden.
Stock futures are currently high, but it’s anyone’s guess where they’ll point in an hour’s time. As of 7 a.m. EST, December gold futures are down -2.6, though there’s no telling how investors will react to election news as it develops. Long-dated Treasury securities have climbed steadily in the past weeks, only to dip early today and eventually level off later in the evening.
Markets appear to be adjusting to the fact that there may be no clear victor for the next few days, if not longer if the situation becomes ensnared in the courts. If the results are contested—or worse, confrontational—we should expect to see more of the same until the situation is definitively resolved.
Reactions in the Market
The Congressional picture is clearer than the presidential. Absent a miracle, any Democrat hopes for a “blue wave” scenario have been dashed. Almost 24 hours after the last polling stations closed, it’s looking increasingly likely that we’re headed for a split Congress.
The unsung story of election day is that Republicans will, in all likelihood, retain control of the Senate. The Democratic Party will pick up at least two seats whereas the GOP will pick up only one, leading to a net loss of one seat in the upper chamber. All things remaining constant, Democrats will hold the House of Representatives by a lesser majority than they won in 2018.
A split U.S. Congress, with Democrats retaining the lower chamber by a thinner margin and the GOP controller the upper—both with lesser majorities than before—will do nothing to ameliorate the political gridlock which has afflicted the country for the past two years.
President Trump’s reelection campaign has already announced that it would “immediately” request a recount in Wisconsin. There’s little doubt that other swing states that the President held on election night, including Michigan and Pennsylvania, will also be subject to court-ordered recounts.
It was the case for weeks that long-dated Treasuries were bullish. In the days before the election, 10-year Treasury yields jumped by 4 basis points to 0.89%, their highest levels since June.
Source: CNBC
This pattern says a lot about investor sentiment leading into the election. That long-term Treasuries have high yields implies that there’s a lower risk premium on short-term debt. In other words, the further investors look into the future, the more confidence they have. This is a bullish signal for the equities market in the short-run, but a positive price signal in the long term.
Other Market Responses
The S&P 500 and other broad-market indexes have responded favorably to the news post-election day. Large-cap tech companies, of which only five comprise over 20% of the entire S&P 500, saw a strong bump after Californian voters approved Proposition 22. Affectionately known as “Prop 22”, the ballot measure maintained the independent contractor status of gig workers providing services on app-based food delivery or rideshare platforms.
The passing of Prop 22 saw Uber shares rise 12% on Tuesday night and rival Lyft’s stock get a 9% bump. Representatives of Uber, Lyft, DoorDash, and Instacart have lauded the ballot measure’s passage and intend to use their success in California to model their national campaign. The coalition insists that they will continue providing limited worker benefits while falling short of offering full employment benefits, provisions they insist cannot be sustained under their business model.
Overall, markets appear to be riding a high brought on by a likely moderate and stable, if politically deadlocked, federal government. The Dow and S&P are both up on the day, as is West Texas Intermediate crude oil (+3.93%), as well as international indices such as Japan’s Nikkei (+1.72%), Germany’s Dax (+1.95%), and the British FTSE (+1.67%). The question remains, however, whether these rallies will hold in the event of a delayed or contested election outcome beyond Wednesday.
Financial Stability On The Horizon?
It’s uncertain whether a financial stimulus package is on the way for struggling Americans and businesses affected by the COVID-19 pandemic. This lingering question remains top of mind for many Americans whose livelihoods have been impacted by the economic efforts to contain the outbreak.
The Chapwood Index (CI) measures the true cost-of-living increase in America based on price fluctuations of the top 500 items on which Americans spend their after-tax income. The five-year national CI average is over 10%, which signifies that prices for regular goods and services have been skyrocketing in recent years.
Any deflationary policies that would introduce cash into the money supply, such as a second round of stimulus checks or bail-out packages for industries sidelined by COVID-19, would likely further exasperate the ongoing cost of living issue. The reverse problem is also true: an America mired by legislative gridlock between a GOP-controlled Senate and a Democratic White House would put countless U.S. businesses and families in financial peril.
All signs currently indicate a volatile situation across U.S. markets. There’s no promise of a stimulus package in a split Congress, and any legislative solution would have to require broad bipartisan support—an increasingly rare feat in today’s hyper-polarized political climate.
Precious Metals: A Safe-Haven Amid Uncertainty?
Unlike equities, gold prices, on the other hand, have been hard to predict post-election. In six out of the nine (~66%) presidential elections since 1992, gold prices have either gained or remained around their pre-election baseline ten days after the election. As depicted by the chart below, the 2016 election saw the most bearish price path after falling -5%, at a time when the U.S. equities market was breaching all-time highs.
Source: FxEmpire
Under normal circumstances, there’s little to no indication which direction gold prices move following an election result. However, these are anything but normal circumstances. The contest is still undecided, the credibility of the democratic process is being brought before the courts, and the equities market is seeing a spike under a likely Democratic victory scenario.
When a large segment of the American population believes that a presidential election result is fraudulent, the bedrock institutions of society are thrown into jeopardy. This spells doom, albeit temporarily, for an investing public pining for stability.
In all likelihood, investors are staring down a financial market fraught with instability and uncertainty. Chances of a swift legislative solution or relief package are grim with a split Congress. These are negative signals for the stock market and positive ones for alternative assets such as precious metals and cryptocurrencies, which are largely non-correlated with the equities market.
For centuries, gold and silver bullion have been considered disaster hedges. Investors looking for insight into the election and gold prices should feel particularly bullish on precious metals as a form of portfolio insurance.
If the equities market tumbles in the days ahead, non-correlated assets like physical silver and gold bullion, or paper-backed gold like gold ETFs, are bound to see positive price movement. Historically speaking, when the stock market dips, gold and silver see a price jump. As the electoral process plays out, savvy investors would do well to consider diversifying with these options in mind to hedge against stock market volatility.
In Muddy Political Waters, There’s A Silver (And Gold) Lining
For now, economic optimism is tempered. In the wake of the election, we’re left with more questions than answers. As fate would have it, investors were looking for a stable outcome on November 3, but we’ve received anything but.
There may be weeks of recounts in close swing states ahead, including in Nevada and Michigan. The contest at the ballot box is over, but the contest in the courts has just begun.
In the meantime, risk-conscious investors would do well to escape the volatility of the equities market by taking a position in precious metals. To hedge against the widespread systemic uncertainty caused by a contested election, consider investing in gold or silver bullion. This way, you can protect more of your wealth if markets suddenly take a turn for the worse post-election, as they’ve been known to do in years past.
Don’t know where to start? Check out our reviews of the best precious metals IRA companies today to find a vendor and custodian for your IRS-approved gold and silver assets. For more insights into self-directed investing, and to find out how you can hang onto more of your wealth amid an uncertain market, read our review of these top-rated investment newsletters.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Liam Hunt, M.A., is a financial writer covering global markets, monetary policy, retirement savings, and millennial investing. His commentary and analysis have been featured in the New York Post, Reader's Digest, Fox Business, and Forbes.
