What If Election Results Are Delayed or Contested? - Fidelity ...
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FIDELITY INSTITUTIONAL INSIGHTS What If Election Results Are Delayed or Contested? Election uncertainty is no reason to abandon financial plans. KEY TAKEAWAYS • The election outcome may be delayed by mail-in voting and lawsuits. • The U.S. political system has rules that ensure these obstacles will be overcome and offices filled. • Markets may be volatile if the election is unresolved. • Short-term volatility is not a reason to abandon a long-term financial plan. While polls continue—as they have for months—to show former Vice President Joe Biden leading President Trump, financial markets are suggesting the vote could be close and that the outcome of presidential and congressional elections may not be known on November 3. In anticipation of the markets potentially turning volatile if the vote’s outcome is not known on election day, some investors and traders have been building hedging strategies using derivatives, gold, and options. Concerns center on how much the COVID-19 pandemic may affect the speed with which votes are cast by mail and counted and the potential for prolonged litigation. Dirk Hofschire of Fidelity’s Asset Allocation Research Team sums up the situation, saying, “There’s a reasonable probability we won’t know the outcome for at least a few days and maybe a few weeks after election day. The pandemic is creating huge logistical challenges for the electoral process, making in-person voting more difficult and causing delays in counting due to the high volume of mail-in ballots.” To be sure, a delayed outcome is not inevitable but regardless of the result, one thing is certain: The election result is not a reason to change long-term financial plans. Markets may turn choppy but volatility should pass and may even provide opportunities for investors holding cash to buy stocks at attractive prices.
EXHIBIT 1: The road to the White House
How the electoral college chooses the president
Congress counts President and vice
Jan. 20
electoral votes and Jan. 6 president are inaugurated. 2021
declares a winner. 2021
Dec. 23
2020
Dec. 14
Election day 2020
Electoral college
Dec. 8
2020 voting must be
complete.
Nov. 3
2020
Electoral college meets
to vote for president
and vice president.
States confirm the electors
who will represent them in
the electoral college.
Source: Fidelity Investments.
Challenges within a stable system defeat in close outcomes. “The highly polarized
While the pandemic and the use of mail-in voting partisan atmosphere isn’t making this situation any
present unique circumstances, federal election law better and I expect a messy or prolonged aftermath
recognizes that delays are likely and includes a specific could extend into December and maybe even
timetable and provisions for resolving challenges January,” he says.
that may arise as votes are counted. The 133-year-
There will be resolution
old Electoral Count Act allows 35 days following the
election for states to complete their counting and for But while disagreement and delay in the election
any legal challenges to the results to be resolved. outcome would add yet more turmoil to a tumultuous
year, it would not necessarily be catastrophic for
As orderly as the path from election day to
the government or for the markets. Nor would it be
inauguration may look on paper, some aspects of the
unprecedented. In 2000, procedural and technical
law are ambiguous and it’s reasonable to expect that
issues involving vote counting in Florida led Democrat
the complications involved in this year’s vote could
Al Gore’s campaign to challenge the declared victory
yield court cases and other delays along the way. Also,
of George W. Bush. After five weeks of uncertainty,
Hofschire foresees the possibility that the parties may
the Supreme Court considered Gore’s claims and
prefer to challenge outcomes rather than concede
ruled in favor of Bush on December 12. Then, as
What If Election Results Are Delayed or Contested? | 2now, stocks had recently hit a record high, and the administrative agencies, and courts play important
S&P 500® declined 7% during the period between roles in the making and implementing of government
the election and Gore’s concession. Meanwhile, the policy and continue to operate predictably, whether
U.S. government and economy continued to operate or not the outcome of legislative or executive branch
despite the uncertainty over who would be its next elections is known.
head of state.
How might markets be affected?
The distributed nature of power in the U.S. system of
government is one reason why an unresolved election While laws govern how to resolve a contested
didn’t pose a risk to stability in 2000 and isn’t likely election, there are no rules that limit how volatile
to in 2020. The president does not hold a monopoly financial markets may become or what might trigger
on power and; the constitution specifies when a that volatility. Historically, the record shows markets
president must leave office and provides a system of do respond to political and other non-financial
checks and balances between the three branches of events and many investors expect that an unresolved
government. The system even provides a way to deal election result could be accompanied by increased
with the unlikely event that a president would not be volatility in markets, as was the case in 2000. “Given
determined by inauguration day when the Speaker of the pandemic, passions surrounding this election, and
the House would become the acting president. uncertainty about how and when the election results
may be resolved, it would not be surprising if markets
Another feature that further stabilizes the system is the
got volatile,” says Hofschire.
fact that the elected executive and legislative branches
are not the only pillars upon which government sits. Markets dislike uncertainty and they can prepare for
Unelected entities such as the Federal Reserve, events that they can see coming. They are also efficient
EXHIBIT 2: Volatility may accompany the vote, but other things matter.
Historically, stocks become volatile around elections and markets are pricing in volatility for the rest of the year. However,
Fidelity analysts don’t see the election as the biggest factor in how markets may perform in the coming months.
Equity volatility around elections Fidelity company analyst survey
2016 2020 Average since 1990 Percentage of Respondents
VIX Level 90%
Election Day
35
80%
30 70%
60% Which will have a larger
25 impact on your industry
50%
in the next 6 months?
20 40%
30%
15 20%
10%
10
-50-45-40-35-30-25-20-15-10 -5 0 5 10 15 20 25 30 35 40 45 50 0%
Trading Days from Election U.S. Election Covid-19
Left: VIX: Chicago Board Options Exchange Volatility Index® (VIX). Data for the 2020 line after 9/30/20 derives from VIX futures contracts until the next contract
date. The rest of the 2020 line and all others show historical VIX levels. Source: Bloomberg Finance L.P., Fidelity Investments Asset Allocation Research Team
(AART), as of 9/30/20. Right: Source: Fidelity Investments Asset Allocation Research Team (AART), as of 9/30/20.
What If Election Results Are Delayed or Contested? | 3and stock prices often reflect risks that investors Investors who experience anxiety when stocks drop
believe may exist in the future. Unlike the contested should remember that’s a normal response to volatility.
election of 2000 which caught markets off-guard, many It’s important for investors to consider sticking with
observers believe that today’s stock prices reflect their long-term investment mixes and to have enough
expectations that the election may not initially produce growth potential to achieve goals. Investors who can’t
a clear winner. Those factors could reduce potential tolerate the ups and downs of their portfolios should
volatility if the election is unresolved. The abundance consider a less volatile mix of investments that they
of hedging strategies being employed by cautious can stick with.
traders might also produce a rally if the election is
settled quickly and those investors exit their hedges Policy matters
and return to stocks. A close, delayed, or contested election is by no
means certain. A decisive result is also possible, but
Staying the course whether the election is settled quickly or only after
While the combination of political dysfunction and a lengthy legal challenge, it will be settled and the
volatile markets may be a recipe for anxiety, volatile winners will take their seats in the White House and
periods are as much a part of investing as capital Congress. They will face the challenge of reviving an
gains. Attempting to “time the market” and move economy that is fitfully recovering from COVID-related
in and out of stocks in anticipation of volatility that shutdowns. They may seek to change current policies
might happen is a risky approach that history says may on taxes, spending, regulation, and more, the sorts
increase the likelihood that investors may not reach of governmental issues that can impact the markets
long-term goals. History shows that staying invested and our clients’ financial wellbeing. Our investment
and diversified is a better approach to confronting teams closely monitor these issues and incorporate
anxiety. The financial crisis of late 2008 and early 2009, policy analysis into their decisions. As Lars Schuster,
when stocks dropped nearly 50% might have seemed institutional portfolio manager with Fidelity’s Strategic
a good time to run for the perceived safety of cash. But Advisers, LLC puts it, “We focus on policy, not politics.”
a Fidelity study of 1.5 million workplace savers found While the causes of present uncertainty may be unique,
that those who stayed invested in the stock market we’ve been through times of turmoil before. Now,
during that time were far better off than those who as always, the key for investors is to stay focused on
headed for the sidelines.1 personal goals and their plans to reach them—no matter
what life, elections, or the markets may throw at them.
What If Election Results Are Delayed or Contested? | 41 This statement is based on a longitudinal study of active participants in Fidelity record-kept corporate defined contribution savings plans. The data looked at a cohort of 1,470,700 participants who were active in workplace savings plans for the entire period from June 2007 through June 2017. Roughly 1.5% of participants went to 0% equities during the fourth quarter of 2008 or first quarter of 2009. Please note that past performance is not a guarantee of future results and the averages can obscure significant variation for individual account results. Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. Views expressed are as of October 2020, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the authors and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information. Information provided in this document is for informational and educational purposes only. To the extent any investment information in this material is deemed to be a recommendation, it is not meant to be impartial investment advice or advice in a fiduciary capacity and is not intended to be used as a primary basis for you or your client’s investment decisions. Fidelity and its representatives may have a conflict of interest in the products or services mentioned in this material because they have a financial interest in them, and receive compensation, directly or indirectly, in connection with the management, distribution, and/or servicing of these products or services, including Fidelity funds, certain third-party funds and products, and certain investment services. Investing involves risk, including risk of loss. Past performance is no guarantee of future results. Diversification and asset allocation do not ensure a profit or guarantee against loss. Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk. Indexes are unmanaged. It is not possible to invest directly in an index. VIX® is the Chicago Board Options Exchange Volatility Index®, a weighted average of prices on S&P 500 options with a constant maturity of 30 days to expiration. It is designed to measure the market’s expectation of near-term stock market volatility. S&P 500® is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. S&P 500 is a registered service mark of The McGraw-Hill Companies, Inc., and has been licensed for use by Fidelity Distributors Corporation and its affiliates. The Chartered Financial Analyst® (CFA®) designation is offered by CFA Institute. To obtain the CFA charter, candidates must pass three exams demonstrating their competence, integrity, and extensive knowledge in accounting, ethical and professional standards, economics, portfolio management, and security analysis, and must also have at least four years of qualifying work experience, among other requirements. Third-party marks are the property of their respective owners; all other marks are the property of FMR LLC. Fidelity InstitutionalSM provides investment products through Fidelity Distributors Company LLC; clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC (Members NYSE, SIPC); and institutional advisory services through Fidelity Institutional Wealth Adviser LLC. Personal and workplace investment products are provided by Fidelity Brokerage Services LLC, Member NYSE, SIPC. Institutional asset management is provided by FIAM LLC and Fidelity Institutional Asset Management Trust Company © 2020 FMR LLC. All rights reserved. 936090.1.0 1.9900698.100
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