The election result the stock market is really afraid of

Wall Street’s nightmare scenario on Election Day isn’t really a Donald Trump or a Joe Biden victory. It’s one where there’s no clear winner, or a result one side refuses to accept.

“We’re kind of preparing for Armageddon on November 3,” one senior vice president at a major quant firm, who asked for anonymity in order to speak freely about the matter, told me. “If it’s close, there’s a decent chance that, like, who the fuck knows? Are markets going to be down 20 percent on Wednesday?”

One of the higher-ups at his firm recently sent an email asking about a what-if scenario where President Donald Trump sends in the National Guard post-election. At the very least, there are some concerns about possible presidential tweets. Investors are bracing for volatility.

Most of the time, markets are not super impacted by who is in the White House, at least in the long term. At a press conference in September, President Trump said that a Biden victory for the presidency would cause “stocks to crash like you’ve never seen before.” But many people predicted the same thing about a potential Trump win in 2016, and about Barack Obama years before. Under both men, stocks climbed, and Wall Street did just fine.

“Markets don’t give a shit about who’s president,” Barry Ritholtz, the founder of Ritholtz Wealth Management and a columnist at Bloomberg Opinion, told me.

In recent weeks, I spoke with multiple insiders, analysts, and experts about their take on Trump vs. Biden. The takeaway is a complex one — after all, Wall Street is hardly a monolith, and they’re not all giving off Gordon Gekko vibes.

Most acknowledged that Trump has been largely favorable to the markets because of tax cuts and his administration’s deregulatory bent. A Biden win would likely mean an increase in taxes, which investors wouldn’t love. And even if the anti-billionaire rhetoric hasn’t been flowing from Biden directly, they’ve heard it from other prominent Democrats.

“Rich white guys watch way too much cable news and think everyone is after them. I don’t get it, but these guys are all doing fine in the markets and live in their bubble,” one Palm Beach private equity associate said in an email with regard to their bosses’ dislike of Biden. “They really only care about taxes and it’s quite infuriating.”

But many aren’t looking at a potential Biden win as a doomsday scenario. There are plenty of sectors that could do well under the former vice president — green energy, for example — and investors think a Biden administration would likely cool it on tensions with China and be more dovish on immigration, both welcome moves. Plus, markets and big corporations like stability, which it’s hard to argue the current administration is consistently delivering.

“Wall Street sees advantages and disadvantages to both candidates,” said Kristina Hooper, chief global market strategist at Invesco. “It’s not as clear cut as you might normally see in an election.”

What Wall Street is weighing isn’t really “Trump vs. Biden,” it’s “Trump vs. Biden vs. ???,” and that third option is the scariest, though not the likeliest.

Wall Street prefers certainty, and an undecided election means anything but. Imagine the United States hits November 4, 14, 24, even December, and it’s still not clear who won the presidential election or which party will have control of Congress. Especially with mail-in voting, it’s a real possibility.

Or, say there is an outcome but one side refuses to accept it. Trump and Republicans are already starting to set the stage for casting doubt about a Biden victory, and there are concerns about domestic and foreign actors potentially confusing the outcome of the election. Some Democrats say they won’t trust the results if Trump wins.

“One of the foundations of a democracy is fair and objective voting, and if that’s now not perceived to be the case, then who knows,” said Jack Ablin, founding partner of Cresset Capital.

There is recent precedent for an uncertain outcome: George W. Bush vs. Al Gore in 2000. The weeks after the election, while the country turned its attention to the outcome in Florida, was not a great time for investors, as Stephen Mihm at Bloomberg recently explained. By the end of November of that year, the S&P 500 was down by 10 percent, though markets were bouncy, depending on the news of the day. Once the Supreme Court issued its decision in the matter, the markets recovered, at least for a while (they later declined, but for other reasons).

As Mihm outlines, it sort of comes down to a philosophical divide between risk you can measure and uncertainty you cannot, outlined by economist Frank Knight in 1921. “The first could be calculated and a wager made based on the odds; the second was a genuine shot in the dark,” Mihm wrote.

“The stock market would rather be handed what is perceived as bad news so that people can make an educated decision,” said Ken Greene, a financial adviser based in Nevada.

In the 2000 election, the issue wasn’t really figuring out the risk of a Gore presidency compared to the risk of a Bush presidency, it was that nobody had any idea what was going to happen day to day or how things might shake out. This time around, we could see something even more chaotic.

Isaac Boltansky, director of policy research a Compass Point Research & Trading, told me that he has discussed a number of election-related issues with clients: what’s going on with deal-making and antitrust scrutiny, what to expect from the housing market, how to think about the banking industry and trade and taxes. “The No. 1 worry that I’ve heard over the last few weeks is not knowing who will be the winner,” he said.

And it isn’t just the presidency. The outcome of the Georgia US Senate race might not be known until 2021 — and, therefore, potentially which party controls Congress.

“If everybody is adult and calm and rational and says let’s count all the votes and figure out who won, it will be fine,” Ritholtz said. “If the crazies come out, and there are a lot of crazies … Mr. Market will not be happy with that at all.”

His takeaway: “That kind of unrest and turmoil, that’s a recipe for the market getting shellacked.”

President Trump would like everyone to believe that he is 100 percent responsible for the stock market when it goes up and that he has nothing to do with it when it goes down. The truth is neither. The market is influenced by a lot of things day to day, some related to politics, some not.

Trump, overall, has been favorable to corporate America and Wall Street. In 2017, he signed into law a $1.5 trillion tax cut bill that disproportionately benefited corporations and the wealthy. (After signing the law, he literally told friends at his Mar-A-Lago resort that they “just got a lot richer.”) His administration has also taken a deregulatory approach to most industries.

A Biden administration is likely to change course on some of that. He has proposed increasing the corporate tax rate from 21 percent to 28 percent (Trump reduced it from 35 percent) and increasing the top individual income tax rate, among other measures. The former vice president has pledged not to raise taxes on anyone making under $400,000 a year. A Biden administration would also likely bring about tougher regulations on certain industries, such as fossil fuels and coal.

“When you implement a higher corporate tax, that means [corporations] are not going to be investing as quickly, which means the multiple on the market might compress,” said Luke Lloyd, a wealth adviser at Strategic Wealth Partners.

Ablin estimates that a corporate tax increase of the size Biden is proposing could be worth about 10 percentage points in the market. “That said, if Vice President Biden were to win, he would need Congress’s help,” he said, and it’s not clear Democrats will have a majority. “I think investors are taking more of a wait-and-see approach on that one.”

If the market does indeed contract around a Biden win, if past serves as precedent, it will eventually come back and do just fine. In fact, historically, investors have done better under Democratic leadership.

Getting past the top line, Trump and Biden mean different things for different sectors. Trump has done a lot of defense spending; Biden would likely be better for green energy. Those in private equity would rather not see an increase in capital gains taxes that could potentially come under Biden. Companies with more exposure to China may also benefit from an administration with a less rocky relationship with the country — Wall Street has reacted negatively to the US-China trade war. “If you look at Chinese equities over the last couple of months, they ebbed and flowed with Biden’s improving or trailing chances,” Ablin said.

“Both candidates present risks,” Hooper said. She also noted that much of what’s been driving Wall Street, especially lately, has nothing to do with the president at all but instead has been tied to the Federal Reserve, which has made enormous efforts to boost markets. “It has very little, if anything, to do with the occupant of the White House.”

The conventional wisdom is often that Republicans mean good for Wall Street and business and Democrats mean bad, but that’s not necessarily the case. And not everyone in the arena agrees. As some billionaires were lighting their hair on fire over the prospect of a Warren presidency during the Democratic primary, she was amassing plenty of fans in finance, too.

Despite his working-class roots, the former vice president was largely Wall Street donors’ preferred candidate among the 2020 Democrats, and he and the Democrats are doing quite well with them in the general election, too. Paul Thornell, a former managing director for federal government affairs at Citigroup, told Politico that part of it is that the big banks, for example, aren’t just worried about taxes. “They’re looking at character and how these two conduct themselves as leaders,” he said.

Billionaire hedge funder Leon Cooperman, who during the primary crusaded against Warren, in a recent interview with CNBC said that while he thinks Trump has “good economic ideas,” he also has “limited character.” Cooperman said he hasn’t made up his mind on who to support and added that he’s not sure what Biden stands for — a coded, but not uncommon, sentiment among investors worried about how much progressives have the former vice president’s ear. When I emailed him asking him if he had made up his mind, he responded, “I have a firm view but no need to go public!”

The Biden campaign is leaning into the theme that Trump is too erratic for anyone to stomach, rich or poor.

“Like everything else that’s been handed to him, Trump inherited a strong economy and squandered it, plunging us into a recession,” said Biden campaign spokesperson Rosemary Boeglin in an emailed statement to Vox. She added that the former vice president “knows that the words of a president matter and have the power to move markets, which is why Americans — regardless of their pocketbooks — are crying out for his stable leadership.”

The Trump campaign did not respond to a request for comment.

It’s hard to look at the Trump presidency objectively and think it hasn’t been good for corporate America and Wall Street’s bottom line. It’s also impossible not to recognize it’s been chaotic. Hundreds of thousands of Americans are dead in a pandemic, and the economy is deeply troubled — millions of people are out of a job, small businesses are suffering, and state and local governments are flailing.

One investment bank vice president who focuses on commodities and oil laid out how he sees the stakes even for giant oil companies: “A Green New Deal or what have you is an existential threat to the fossil fuels business, but the thing is, what’s much more likely to happen is the pandemic rages indefinitely, and no one goes anywhere,” slowing consumption of those fossil fuels anyway.

He is a Biden supporter and has given money to Democrats this election cycle. But a Biden loss isn’t his worst-case scenario. “I would much rather Trump win handily and demonstrably than any kind of ambiguity,” he said. “It is the worst possible thing.”

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