As we welcomed the new decade earlier this year, it was all sunshine and roses for the U.S. economy and markets. The S&P500 gained 30% last year, unemployment sat near 50-year lows, and even though we were in a trade war, the economy kept plugging along. Tack on low taxes and easing government regulations, and you get a pretty good recipe for joy on Wall Street.
All that now seems like a million years ago.
One pandemic, economic shutdown, and race-related protest and riot season later, and the U.S. economy has been upended while the political winds are shifting. Investor concerns over election-fueled volatility have regained prominence in recent weeks, even as broader market swings have subsided and stocks have regained most of their lost ground.
Election-related risk captured in VIX futures has risen to about three times the levels seen ahead of the 2012 and 2016 elections based on the spread between September and October futures.
It’s not just that the election will be close, it’s that polls are showing Trump losing some ground over his handling of the pandemic and the protests sparked by the killing of George Floyd in police custody.
A Democratic victory could threaten policies championed by Trump and generally favored by Wall Street, including lower corporate tax rates and fewer regulations.
Analysts at BofA Global Research said:
“A potential victory by Joe Biden … and to a greater extent, a ‘Democratic sweep,’ are generally considered more market-unfriendly outcomes.”
A recent Reuters/Ipsos poll Biden extending his lead over Trump among registered voters to 10 percentage points – the biggest margin since the former vice president became his party’s presumptive nominee. More than 55% of Americans said they disapproved of Trump’s handling of the protests.
Betting site PredictIt showed Biden increasing his lead from 6 points to 9 over the last month.
Polls have been wrong before, especially this far away from the election. But if Biden remains consistently out front in the weeks and months ahead, the markets might feel some pain, which could be bad for your retirement account.