The United States (US) elections have become a prism though which we can view the world we live in. One where alternative realities can coexist and consensus seeking is becoming increasingly difficult. In that world, experts get humbled by the novice, where popular sentiment overwhelms rational logic and where the rules get rewritten and reinterpreted on a daily basis. By all indications, we will see President-elect Joe Biden as the next president of the US but with President Donald Trump as yet to concede defeat, we are left in the twilight zone where uncertainty still reigns. So how did we get here?
Polls were wrong?
The polls and certain sections of the mainstream media never gave Trump much of a chance of retaining the White House. Despite a larger lead than ascribed to Hilary Clinton in 2016, Biden still lost in some battleground states like Florida and Texas. In the end, it was a more closely run election than most – except Trump himself of course - predicted. And this despite what is estimated to be the highest voter turnout since 1908, which would have favoured the Democrats.
Some high-profile political analysts like Nate Silver only gave Trump a 10% chance of winning. These odds were higher in the betting markets but still well under a 30% probability. When President Trump took an early lead when the count began, betting markets quickly shortened Trump’s odds of winning to 70%, with an early Florida win being seen as a harbinger of another upset. This further fueled the view that the mainstream media had been unfairly biased against the incumbent. But as larger cities and mail ballots started to be counted, it became clear that Biden was gaining in other key battleground states and betting markets started discounting a tentative blue victory within a day.
Currently, the debate is around the cut off time for mail ballots and allegations of widespread fraud. None of this has been substantiated at the time of writing. The lesson here is that experts are never meant to be prescient or always right but have a higher probability of forecasting a highly unforecastable event. In elections, as is in investments, a rigorous approach reduces forecast risk. It is true that President Trump with over 70 million votes had a stronger showing than most pollsters would admit but in the end the polls were still right in forecasting the 46th President of the United States.
The echo chamber
Social media has created an environment where conspiracies are rife, and people can congregate in their chosen echo chambers making discourse almost impossible. Before Trump became president, he had around 3 million Twitter followers. Contrast this with his current 88 million followers and his ability to communicate his views directly to his supporters. Trump now makes the news as demonstrated by the number of his comments attacking the legitimacy of the results and various unsubstantiated claims about electoral fraud.
Faced with a deluge of information, it is becoming increasingly difficult to distinguish between facts and fake news. And so far, President Trump has continued to suggest that a recount would yield a different outcome, delaying any prompt transfer of power.
What about markets?
We initially feared a Bush-Gore like scenario from the 2000 election, which required a recount. With George W. Bush having won Florida by 537, legal challenges ensured, and markets went into a tailspin with risky assets selling off and investors going headlong into safe havens such as bonds and gold. In this instance, markets have quickly discounted a Biden White House win but a Republican controlled senate. This calmed nerves in the bond market where any indication of a multi-trillion fiscal stimulus package would have spooked market participants. In actual fact, the US 10-year staged a strong rally before ending on a more even keel. Equity markets rejoiced in what is expected to be improved international trade relations. Emerging market currencies strengthened as the greenback lost ground, with the rand leading the pack. The chart below shows how the rand has strengthened against the dollar in recent weeks. A ceasefire between the US and China should be beneficial for emerging market equities and a stronger rand should also help dampen any fears of inflation, which would be a goldilocks scenario for domestic markets.
In the end, global equity markets tend to do better under a democratic president. As markets stage a massive rally on the news of a Coronavirus vaccine, it becomes impossible to estimate the impact of the US electoral results on global markets. In this topsy-turvy world of ours, you can always choose what makes the news.