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Why Is Ballot-Counting Causing Market Volatility?

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First off, the issue is that a prolonged delay in ballot-counting in the 2020 presidential election would create significant uncertainty regarding who the next president will be.

Volatility has certainly been a theme throughout September and October of 2020. The S&P 500 dipped 9.6% between September 2 and September 23, before rising 5.2%. Volatility rose more than 8% between September 1 and October 5. Tech stocks sold off in September on valuation concerns, contributing to much of the correction on the S&P 500. Value stocks also sold off on concerns that the V-shaped economic recovery was no longer intact. But there were some days on which all stocks were down harshly and there were no important economic or earnings releases.

Meanwhile, many on Wall Street have flagged ballot-counting as a near-term risk they are concerned about. Investors have digested that, with a Congress likely to be close to gridlocked — regardless of whether Democrats have majority control of both chambers — policy changes are likely not to be drastic. That leaves election risk to the ballot-counting issue.

But we already know what Biden’s policy agenda will be on corporate and individual taxes, renewable energy and trade. We already know Trump’s agenda is to lower corporate taxes, even if he can’t lower them too much. And we know that, either way, things aren’t likely to change so drastically.

So what’s the volatility all about?

Certain events cause market volatility simply because of the uncertainty they pose and the expectation from investors that other investors will behave in a risk-averse way upon the event. It does become a bit of a self-fulfilling prophecy. Most market participants and analysts note that the risk here is completely near-term, although of course some portion of the risk is centered on the uncertainty over the direction of the incremental change in policy.

To put a number around the ballot-counting risk, LPL Financial notes that the S&P 500 fell 8% between election day in 2000 and the day Vice President Al Gore conceded the election. That was after a vote recount, which was a more extreme scenario than another likely scenario, in which the ballot counting is merely delayed due to complications. 

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