Recounting the Election

“We are not enemies, but friends. We must not be enemies. Though passion may have strained, it must not break our bonds of affection. The mystic chords of memory, stretching from every battlefield and patriot grave to every living heart and hearthstone all over this broad land, will yet swell the chorus of the Union, when again touched, as surely they will be, by the better angels of our nature.”

– Abraham Lincoln, First Inaugural Address, 1861

The printing presses ran almost nonstop for months and churned out millions of ballots in anticipation of historically high voter engagement. The incumbent claimed that this election would be “the most important in the history of our country,” and the challenger described it as “life-changing.”¹ Voters agreed. As the final count draws near, the election will have generated both the highest absentee ballot count in history at 65.2 million and the highest voter turnout – roughly 160 million people or 70% of eligible voters – in 120 years.² Most media outlets have called the results in favor of Joe Biden. Despite the presumed win for the Democratic Party, Republicans made inroads “down-ballot” – picking up at least five seats in the House of Representatives and retaining control of the Senate, although the final result will depend on an early January runoff election in Georgia.

It may be premature to glean anything from this election, but the results have shone a light on at least two realities. The first is just how competitive many key races were. Indeed, in an almost mirror image of 2016, the results of the 2020 election were ostensibly decided by a relatively small group of voters in just three states – Wisconsin, Michigan, and Pennsylvania – who between them hold 46 electoral college votes. The second is the immense challenge of forecasting, especially during a period of widescale social and technological upheaval. For example, popular forecaster FiveThirtyEight assigned a one-in-ten chance of a Trump win with an almost three-in-four chance of a “Blue Sweep.”⁵ Several other professional forecasters predicted landslide victories for the Democratic party akin to Reagan’s sweep of Carter in the 1980 election.⁶ To be fair to FiveThirtyEight, their forecasted margin for the popular vote may turn out to be relatively close to the final numbers, but the state-level polls they relied on missed final results by nearly eight percentage points in Wisconsin, Iowa, and Ohio and five points in Florida.⁵ These polls tended to significantly underestimate Trump’s performance in “swing” states that could have been pivotal to the final outcome.⁵ Trump won more votes relative to the total population of eligible voters than Reagan did in his conclusive win in 1980 (an estimated 29.9% for Trump versus 26.8% for Reagan), and he still lost the popular vote by a not trivial 3.3% (and counting).⁷ Biden, who received 75 million votes or 32% of the eligible vote, will claim the title of receiving more votes than any other presidential candidate in history.⁷

Historically, markets have viewed divided election outcomes more favorably than single party sweeps, and we expect this could be the case for 2020, especially because it likely eliminates the chance of a tax policy overhaul. In the 24 elections since 1928, markets have averaged a return of 7.7% from November 1 of the election year to the end of the first year of the next presidential term. The average over that period for divided governments was 10.6%, over 5% higher than the average for single-party sweeps, which generate an average of 5.5%. The 8.6% return of the S&P 500 in the nine days since November 1 is higher than any similar post-election stretch in history.⁸

There are significant challenges facing the incoming administration, but challenges can also present opportunities. New Covid-19 cases and hospitalizations hit new highs in the week of November 9 and continue to increase; however, improvements in therapeutics have contributed to declines in the case fatality rate.⁹ The recent news that the Pfizer BioNTech vaccine candidate, BNT162b2, could be 90% effective was an exciting development,¹⁰ especially since 50 million doses could be available for distribution this year.¹¹ The vaccine news comes as a relief to not just higher risk Americans and weary healthcare workers, but also to the less heroic, but no less weary, value investors. Pfizer’s November 9 announcement ignited a powerful rotation out of large cap growth stocks and into smaller cap stocks and into traditional value sectors, including energy and financials.