And with the possibility of not knowing who the winner will be on Election Day, or in the weeks following, market volatility has crept higher and has investors pricing in uncertainty right up until the Jan. 20 inauguration.
“Presidential tweeting remains a statistically significant driver of volatility and options pricing in interest rates,” JPMorgan analysts Henry St John and Joshua Younger wrote. “Should the topic of those pronouncements turn to topics to which markets have been more sensitive ‒ Covid-19, the election, and geopolitics, for example ‒ it could be a bullish factor for volatility heading into November.”
As the volume of Trump’s tweets has trended higher this year, the focus has shifted from COVID-19 to the election. Tweets containing the word “ventilators” have had the biggest market impact this year, versus last year when the trade war was the big story.
The COVID-19 pandemic is expected to have an outsized influence on the 2020 election, as voters will not only weigh in the president’s handling of the virus, but it will also impact how their ballots are cast.
Mail-in ballots are expected to be more numerous than ever this year as social-distancing guidelines aimed at slowing the spread of COVID-19 have made more Americans reluctant to vote in person. The influx of those ballots could overwhelm the system and cause a delay in the results.
“In our ‘Election Week’ base case, a reliable result won’t be available for at least a few days,” wrote a team of Morgan Stanley strategists led by Michael Zezas. “If polls tighten and indicate the final vote will be close, our base case could shift to ‘Election Month.’"
The U.S. Treasury market earlier this month was pricing in volatility that was six times higher than normal, according to a separate note from St. John and Younger. Ahead of the 2016 election, volatility was three times the norm and twice the average during the two prior elections.
Stock market investors are also worried about the uncertainty.
Monthly pricing for volatility contracts in S&P 500 futures typically trades in a tight tenth or a quarter of a so-called vol point from one contract to the next. Last week, however, September volatility was trading at 17.5 while November was at 23.5, a gap of six points. In January 2020 it was at 24.