In a note published Monday, Solita Marcelli, chief investment officer Americas at UBS Financial Services, discusses how investors should approach election night and the attendant market reaction.
1. Watch the key states.
Both President Donald Trump and Democratic candidate Joe Biden have certain must-win states. The polls largely favor Biden nationwide, but the Electoral College matters most in the end.
Of the last three Republican presidential terms, the president-elect also won the popular vote in only one election.
Trump won Michigan and Wisconsin in 2016, where the polls currently favor Biden by a large margin. That makes the other large and medium-sized states tipping points for this election.
Florida and Pennsylvania become must-win states for Republicans, although even if Democrats do not take these two states, a win in Arizona or North Carolina would still leave a path to victory for Biden.
2. Who counts first will matter.
Pennsylvania is perhaps the most important state in this election, but don’t expect much from it on election night.
Some states have already started counting early votes, while others are not allowed to start processing ballots until after the election. So the focus on election night will be on Florida, North Carolina and Arizona.
If Florida and North Carolina show large wins for Biden, then we can assume he will win the presidency, UBS says, but if they go for Trump, we will have to look more closely at Midwestern battleground states.
3. Don’t forget the Senate.
In the event of a Biden presidency, the question will become whether Democrats can also win the Senate. Democrats need to flip at least four seats from the following races to gain control: Georgia with two, Iowa, Maine, Montana, North Carolina and South Carolina.
The outcome is extremely important for markets and the economy. In the case of a divided government, a fiscal stimulus package may be delayed or not large enough.
On the flip side, a Senate in which Democrats control 55 or so seats would most likely mean significantly higher taxes for corporations and wealthy individuals.
The scenario most likely to please the market would be a “light blue wave” where stimulus passes but the progressive wing of the Democratic Party would not have the votes to pass more aggressive policies, according to UBS.
4. Watch the markets.
The 2016 election was notorious both for how much the polling was off and for how wrong-footed the equity market’s initial reaction was, UBS says. So it is important to take first reactions with a grain of salt.
Beyond overall index levels, watch how different indexes are reacting, such as the Russell versus the Nasdaq.
In a blue wave, small and medium-sized firms should fare better on the back of expected fiscal easing. It is also important to watch Treasurys and the dollar.
Treasurys will likely sell off in a clearer Democratic victory. And UBS CIO expects the dollar to rally if Republicans are winning — noting that sometimes these markets give clearer signals than equity markets.
As a final word, Marcelli notes there’s a lot riding on this election. If the results are not known in a short period of time, and if the elections are still contested after all the votes are counted, a bout of market volatility is almost certain.
Coronavirus cases are resurging across the Western world, and the future administration will need to figure out how to handle the economic fallout from the potential restrictions on the economy, at a time when millions are already suffering because of massive unemployment in the physical service sectors.
“We, at the CIO, will keep our clients and advisors abreast of the latest developments and what they mean for the markets in a timely and frequent manner,” Marcelli says.
— Related on ThinkAdvisor: