Why the 2020 Election Could Be the Biggest Risk Markets Have Ever Faced

There is no shortage of risks to financial markets even in normal years. All bets are off in 2020 given the lingering effects of the Covid-19 pandemic. Now, markets will need to grapple a potentially ugly 2020 presidential election in the US.

Most analysts have agreed that the 2020 election carries a high level of risk. This is due in large part to the very likely scenario of delayed results, a contested election, or outright refusal by either candidate to accept the final vote.

Such a situation could be cataclysmic for most markets, including US equities, FX, etc.

Warning Signs Already Here

These fears are not exactly unwarranted given the polarizing rhetoric coming out of both presidential campaigns in the US. Compounding this fact is the spectre of Volatility Volatility In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Traders In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Traders Read this Term gaps ahead of the election on November 4, 2020.

Investors are always wary of the unknown and the prospect of a contested election or hanging chad could be disastrous for markets.

Many remember the 2000 US election as a particularly difficult stretch that dragged on for weeks without a victor.

2020 could be a similar endeavor. Still, even a clean result for either candidate could bring its fair share of volatility and market risk in an abrupt manner.

Each candidate has opted to chart a very different course, with markets having to process the potential for a new trade war with China, wealth distribution system, or tax restructuring.

A Worst-Case Scenario?

A contested election could create market chaos lasting weeks or longer, pending the lag or delay in announcing a final victor.

Back in 2000, major US indices suffered from steep market corrections during this period while this year could easily see history repeat itself.

Markets are already on edge given the deep partisanship of US politics and economic turmoil caused by Covid-19. Any prolonged period resulting in a rudderless leadership or an unknown victor will stress markets greatly.

This situation obviously marks a worst-case scenario, though it has been increasingly floated as plausible given anticipated lags in mail-in ballot counting.

Investors will clearly stay abreast of any signals leading up to November 4, though by all accounts, bracing for uncertainty appears to be the best course of action in 2020.