What a Contested Election Could Do to the Stock Market

Shah Gilani|October 1, 2020

Market analysts almost always use history as a guide when calculating likely stock market moves, especially when it comes to elections. This year’s no exception.

But, of all the historical references and metrics being incorporated this time around, there’s really only one that matters.

This election is going to be “contested” and only one other presidential election in modern era has been contested, and we know what the market did then.

Here’s why Tuesday’s debate almost guarantees a contested election, what the market did the last time the country waited to find out who their next president was going to be, and how you can profit handsomely by putting on an inexpensive option position to ride out the storm.

Actually, there have been four contested presidential election in the United States’ history.

In the 1800 presidential election Thomas Jefferson and Aaron Burr tied at 73 electoral ballots each. The House, under the Constitution, then chose between Jefferson and Burr for President. After six days of debate and 36 ballots, Jefferson won.

In 1824, Andrew Jackson won a plurality of the national popular vote and 99 votes in the Electoral College-32 short of a majority. John Quincy Adams was runner-up with 85, and Treasury Secretary William Crawford had 41. The 12th Amendment required the House to consider only the top-three vote-getters when no one commands an overall majority. The House chose Adams over Jackson.

The contested 1876 presidential election between Republican Rutherford B. Hayesof Ohio and Democrat Samuel J. Tilden of New York was the last to require congressional intervention. Tilden won the popular vote and the electoral count. But Republicans challenged the results in three Southern states, which submitted certificates of election for both candidates. In January 1877, Congress established the Federal Electoral Commission to investigate the disputed Electoral College ballots. The bipartisan commission, which included Representatives, Senators, and Supreme Court Justices, voted along party lines to award all the contested ballots to Hayes-securing the presidency for him by a single electoral vote.

In the modern era, the 2000 presidential election between Democrat Al Gore and Republican George W. Bush was contested when the Florida vote count became too close to call. While the Florida Supreme Court ordered a statewide recount of undervotes, George Bush petitioned the U.S. Supreme Court to overturn Florida’s recount ruling. The Supreme Court expressed its displeasure with how things were going in Florida by sending the Bush plea back to the Florida Supreme Court by a 9-0 vote, saying basically, We would rather not get involved, but you are messing this up. Fix it. The Florida Supreme Court ignored the warning and pressed forward with its call for a recount. The Supreme Court, first by a 7-2 vote, determined the Florida recount was unconstitutional on the grounds that there were no clear standards that were being applied consistently to all ballots. Then, by a 5-4 vote, declared that time had run out to devise a remedy. That stopped the process, with Bush ahead. Gore conceded, ending the drama on December 15.

Impatient Markets and an 8% Loss

Markets didn’t like waiting.

The S&P 500 tumbled more than 8% between the Nov. 7 election and Dec. 15, when the winner was finally decided.

Both candidates in the debate Tuesday made it clear neither was backing down on how the upcoming vote should or shouldn’t be conducted. Both the Democrat and Republican parties have said they expect the election to be contested and wouldn’t let their candidates concede.

Besides the presidential election, voters are casting ballots to elect members of the House and Senate. No-one’s talking about those elections being contested, but there may clashes over ballots in those races too.

The only thing most politicians seem to agree on is this election will indeed be contested.

In a MarketWatch article titled, “Why stock market investors are starting to freak out about the 2020 election,” DJ Peterson, the president of Longview Global Advisors, a Los Angeles-based geopolitical consulting firm, outlined a number of potential risk scenarios that he’s looking at tied to the election. They include:

• Voting results delayed past 48 hours (72 max)
• Trump claims the vote counting process and/or certified results are rigged, fraudulent
• Left-and right groups converge on election offices, police caught in between
• Left and right groups clash in the streets of Washington
• Trump calls out the military to restore order or protect the White House
• Use of military is viewed as defending Trump, military is politicized

Equity markets have history to go on, meaning there’ll probably be a bout of profit-taking and selling, more than likely similar to the 8% selloff the S&P 500 experienced in 2000.

With markets rallying today, on a hoped-for stimulus package being agreed to and enacted before the election, it’s a great time to buy some put options on the SPY, the SPDR ETF that tracks the S&P 500, that will soar in value if the election is contested and investors do what they did in 2000.

What to Do Next

I like buying SPY November $300 Puts and paying up to $3.75 per contract.

If investors are going to head to the sidelines, they’ll start before election day and likely sell further on news that whatever the results are, they’re being contested. The November 20 expiration puts are a lot cheaper than the December 18 or December 31 expiration puts.

I’ve chosen the $300 strike price because that’s 10% lower than where SPY is trading today.

It makes sense to position yourself for what seems inevitable, especially if being right can make you a bundle.

And if I’m right, I expect to turn at least a 100% profit on my puts.

Drop a comment telling me how you’re planning to play this thing.

And make sure you grab your tickets to our annual Black Diamond Conference. This year it’s totally virtual, and there’s still time to sign up. I’ll be there – and so will my colleagues, Chris Johnson, Tom Gentile, and D.R. Barton. Just click here for details.

Until then,

Shah