We continue to receive client inquiries about the upcoming presidential election and its impact on US equities, so today we’re laying out a “November-December 2000 Election Playbook”. We’ve highlighted how Q4 of election years only see a meaningful uptick in volatility if the presidential race is contested (i.e. 2000).
Here is how the US equity market responded to events around the 2000 Presidential election:
- Election Week: The election was held on November 7th, 2000, but the outcome was unknown for over a month because of the time it took to recount Florida’s ballots and decide who won its Electoral College votes and therefore the presidency.
The S&P 500 dropped 1.58% on November 8th ,the day after polling ended. The index also sold off the rest of the week and the following Monday as investors awaited the election’s outcome: 11/9 (-0.65%), 11/10 (-2.44%), 11/13 (-1.08%).
The aggregate decline for the S&P 500 from Election Day through the following Monday was 5.6%.
- Week 1 Post-Election: It was not just an unknown election outcome causing investor concern, but also a slowdown in the US economy and the follow-on impact on tech sector fundamentals. After 5 sessions of consecutive declines, the S&P recovered 2.35% on 11/14 amid bargain hunting.
Nevertheless, the uncertainty over the election as well as concerns about US economic growth and tech profitability continued to rattle the markets, causing the S&P to fall 1.26% on 11/16.
From the close on Election Day through the end of the next week on 11/17, the S&P was down 4.5%.
- Week 2: Two weeks after the election, the S&P saw another two +1% down days. On 11/20 (S&P down 1.84%), investors awaited a Florida Supreme Court hearing in which Al Gore’s lawyers tried to persuade 7 justices to include the hand counts of votes in 3 heavily Democratic counties. While he won the case, one of the counties stopped their manual recount of ballots, a headwind for Gore and creating uncertainty over an eventual winner for investors. The S&P dropped a further 1.85% on 11/22.
By the end of a little over 2 weeks since the vote, the S&P was down 6.3% from 11/7 to 11/24.
- Week 3: The S&P experienced its second biggest daily drop since the election of 2.01% on 11/30 to end the month of November. This was not just because of a still unknown election outcome, but also continued worries over weaker technology earnings, higher interest rates and a slowdown in economic growth.
From Election Day on 11/7 through November month-end, the S&P was down 8.2%.
- Week 4: The S&P had its largest daily advance since the election of +3.89% on 12/5 because then Fed Chair Alan Greenspan signaled the US economy may be slowing enough to lower interest rates in the coming year. There were also greater hopes that a presidential outcome would soon come.
The index declined 1.82% the next day on 12/6, however, after Apple Computer cut its quarterly sales targets and Bank of America said its current quarter earnings would miss, causing a selloff in computer stocks, chip makers and financials.
This week ended with a particularly volatile Friday. While the S&P climbed 1.96% during regular hours of trading after a positive Florida court ruling for George Bush, a later decision by the Florida Supreme Court favoring Al Gore caused stock index futures to turn sharply lower after-hours.
Even still, the rally enabled the S&P to register its first weekly advance (+4.2%) in a month and left it down just 4.3% since Election Day.
- Week 5 and through year-end 2000: The Supreme Court decision Bush v. Gore was announced on December 12th. Despite investor relief about the conclusion of the US presidential election, the S&P fell 0.65% that day as a revenue and earnings warning from Compaq Computer further fueled concerns over tech profitability in a slowing economy.
As a result, the S&P was still lower by 4.2% from Election Day (11/7) through the Supreme Court’s decision on 12/12.
In fact, volatility only got worse even with the certainty of the presidential outcome. Later that week, Microsoft announced it would miss estimates for the first time in a decade, leading to a large tech selloff. Post the Supreme Court’s ruling on 12/12, the S&P had 5 more down +1% days through year-end: 12/14 (-1.40%), 12/15 (-2.15), 12/19 (-1.30%), 12/20 (-3.13%), and 12/29 (-1.04%).
From Election Day on 11/7 through year-end on 12/29, the S&P 500 declined by 7.8%.
Bottom line: it took exactly 5 weeks for markets to know the outcome of the 2000 presidential race. Over that period, vote counts and court rulings certainly contributed to market volatility, but the retreat in US equities really started before the election at the end of August when a slew of tech companies started lowering their earnings outlooks. Ultimately, concerns over tech profitability, interest rate hikes to combat inflation, and a slowing US economy were only compounded by the uncertain election outcome.
As for what this means if this year’s presidential race is contested as a worst-case scenario: 1) Not knowing who will be President for days or even weeks after Election Day certainly does contribute to incremental volatility. 2) But investors understand an outcome will eventually be called and can start discounting the winner based on legal proceedings. 3) Long-lasting and significant volatility usually stems from an economic shock as opposed to politically related issues.
Moreover, this year is also different in that the US economy is climbing its way out of a deep recession and earnings estimates continue to rise as opposed to entering into a bear market like in 2000. The Federal Reserve also responded much quicker this time around and has already signaled it will keep near-term interest rates low for the foreseeable future. So all in all, yes a contested Trump versus Biden race could rattle the markets for some time, but as a compounding effect on current macroeconomic issues rather than a key driver of volatility.