But 2020 is a vastly different and more combustible environment, sparking growing unease among investors about the impact of a muddled election result. Protests have already raged in major cities over police violence. And Trump supporters and opponents have engaged in sometimes violent clashes in recent weeks. Trump regularly advocates violence against journalists at his rollicking campaign rallies.
The U.S. also continues to face a brutal pandemic that has killed more than 200,000 Americans and spurred a massive economic decline. While the backdrop in 2000 came amid a dot-com stock bubble in the process of deflating, the economy was still expanding.
Today’s far more unsettled environment — for markets, the economy and the political system — risks exploding in unpredictable ways.
“The fear is that if we get a disputed election, it could lead to disruption and possibly even violence. If so, we could well see markets take a significant hit,” Brad McMillan, chief investment officer at Commonwealth Financial Network, said in a note to clients. “In 2000, the hanging chad debacle in Florida hit markets, and this election could well be even more disputed than that one.”
In addition to sowing doubt about whether he would accept the election result, Trump has suggested he needs to fill the late Supreme Court Justice Ruth Bader Ginsburg’s seat right away so the high court would be more likely to rule in his favor in a disputed election. The positioning has enraged the left and potentially increased the chances for violent clashes after Nov. 3 if the Supreme Court does in fact have to settle the results.
Some investors would certainly benefit from the chaos of a disputed election, including traders who make their money off market volatility. Wall Street trading desks that depend on heavy volume and large transactions could also see revenues spike. But for the broad swath of American investors who mostly have money in the market through retirement plans, it could lead to panic and a desire to move money into safer assets, possibly driving stock prices down even further.
A rapidly declining stock market generally translates fairly quickly into reduced consumer confidence. That could lead to slower spending — especially amid a pandemic — that can then snowball into a more significant pullback in the broader economy.
Volatility is already spiking on Wall Street as the potential for an ugly election result grows. The CBOE volatility index, commonly known an as the VIX, is near two-week highs and expected to continue to rise as the election approaches.
Most Wall Street executives, traders and investment analysts widely expect the market environment to calm quickly after the election if the result is clear.
Markets could rally on a Trump win based on the expectation of continued low tax rates and a relaxed approach to corporate regulation. A Biden win, especially if Democrats also take the Senate, could spark a short-term sell-off on fears of increased taxes on corporations and the wealthy — though that possibility is increasingly baked into expectations. Certain sectors likely to face new regulation, including banks and the energy industry, could also suffer.
But there is little belief on Wall Street that a Biden win would crush stocks for a longer stretch, as Trump has suggested, particularly given the extreme efforts by the Federal Reserve to boost the recovery. Despite the leftward tilt of the Democratic Party, Biden is not viewed as a radical who would try to fundamentally reshape the economy. He has not supported Medicare for All or backed a broad wealth tax or the Green New Deal.
A Biden win could also reduce some of the tension generated by Trump’s trade wars and generally produce a less volatile and noisy daily political environment, tempering any initial sell-off. Total Democratic control would also likely lead to significant new fiscal stimulus, generally viewed as a positive on Wall Street.
“A Democratic sweep might stir some knee-jerk reaction over higher corporate and individual tax rates and more regulation,” Luschini said. “But that would probably be largely worked through and forgiven as investors care more about the economy than politics.”
But the fear that is growing more intense by the day is that markets will have no idea — perhaps for weeks or months — about who will get inaugurated next Jan. 20. And the potential for real violence to spill out into American communities is no longer treated as a fanciful worry.
Markets recovered a bit on Thursday partly on renewed hopes for an aid package, amid reassurances from senior Republicans that Trump would not really try and hold on to power if he clearly loses in November. But that has not eliminated concern that the election result may remain in doubt for weeks.
“It’s a real fear — and one that, in many respects, I share,” McMillan said in his client note. “From a political standpoint, unless there is a blowout win by one side or the other, we are almost certain to get litigation and an unresolved election. A substantial market reaction would be quite possible.”