This past Saturday, market participants finally got the ‘certainty’ that many of them had been looking for in the US presidential election; Joe Biden had won. After a painstaking ballot count that took close to 4 days before identifying a winner, it was taking Pennsylvania that secured victory for the Democrats, with the state having been officially called blue by the Associated Press. This was a significant come back from the more than 700k vote deficit Biden faced in Pennsylvania on election night – one that Trump and his base have cited as indicative of fraud. Tactically planting the seeds for this moment throughout the past 5-months, Trump and his campaign have not conceded their loss and indeed have launched a slew of legal suits and recount requests in all of the key swing states that came in favour of Biden during the final stretch: Wisconsin, Michigan, Nevada, Arizona, Georgia and, of course, Pennsylvania. Whilst few of the cases have a chance of affecting the final outcome, and many have been defeated, the messaging is clear: Trump will not step down willingly and without judicial challenge.



Such a contest by the incumbent President does not lend itself to a feeling of ‘certainty’, at least for us risk managers. Add to that the prospect of civil unrest throughout the country, with deeply polarized, almost cult-like political passion on both sides, and you get a recipe for some unlikely though high-impact events. But all of this is really just an analysis on what could now be considered widely digested and available headlines, for those who choose to follow them. What is not so widely understood is that the actual presidential election has not even happened yet.

Yes, that is right. The veridical, or actual, US presidential election is set to take place on December 14th, 2020, when the 538 electors (of the Electoral College type) will cast their ballot to elect the next president of the (somewhat) United States. To win this election, a president must receive a majority share of the vote, ie. at least 270 of the total 538 ballots cast. Different states are allotted differing numbers of electors based on the number of congressional delegations in that state, which are themselves designed to be proportional to the population of that state (though with a minimum of 1 congressional delegate per state). State electors are decided via the popular vote of that state in a winner-take-all style, such that a California popular vote for Biden means 55 partisan electors who pledge to vote for Biden on December 14th are chosen. The only exceptions here are Maine and Nebraska, who allow some of their electors to be allotted by congressional district (e.g. 4 electors in Nebraska have been chosen for Trump and 1 for Biden based on how each district voted).

So why does all of this matter? Isn’t Biden already past the 270 required electors required to secure presidency? Biden is indeed projected to secure a minimum of 290 electoral votes, but this does not consider the possibility of any recounts, which are expected in Wisconsin, Pennsylvania, Arizona, and Georgia, or military & overseas ballots arriving late producing a change of result – especially where the margin is a only few thousand votes. There may also be further legal challenges on controversial, alleged election tampering claims such as ineligible voters being counted (Nevada), “#SharpieGate” (Arizona), or re-postmarking mailed-in ballots to conform to deadline dates (Michigan).

But it is not the factual or legal outcome that matters in all of these cases. Putting aside the civil unrest and continued polarization, the state-level disputes only have to change the minds of the electors themselves. Across the US, only 33 states have enacted legislation to impose that the chosen elector vote as directed by the state popular vote. Not doing so would render the elector a ‘faithless defector’ – and there were 10 of them in the 2016 election. Of the 10 defectors, 7 of them came from states allowing such defections (meaning 3 votes were voided): 2 from the Trump camp and 5 from the Hillary camp. Their ballots were cast for the likes of Bernie Sanders, Colin Powell or Ron Paul and were ultimately inconsequential in the overall outcome, which was in favour of Trump at 304/538.

Should tighter margins be at play, however, defectors may wield a greater influence this time around. All it may take is a change of heart, an updated ballot recount or newly emerging candidate information between now and December 14th to change alliances. There is no precedent for state courts ordering electors to change their vote based on updated information either, or even ordering a change in the elector. Given the compartmentalized state election laws, decisions in one state (not upheld nationally) could even influence the electors in another state! Partisan efforts have worked relentlessly in past elections (including 2016) to sway elector votes away from their pledged candidate, and there is no reason to expect this time to be any different. In 2016, one elector from Michigan stated that he had received death threats ahead of the scheduled electoral college vote. There is also no precedent for how to deal with situations such as an assassinated elector, but in today’s political climate, the shear plausibility of the scenario is unsettling. It is interesting to note that betting markets are still pricing in a ~10% probability of Trump being the next President so it’s clearly not a done deal just yet.

Not to plagiarize one of my favourite TV infomercials, but “wait! There’s more!”. After the December 14th vote of the Elector College, both chambers of Congress (the Houses of Representatives and the Senate) convene on January 6th, 2021, to read the votes cast from each state. If any pair of a representative and senator (any two, from any two states) object to a particular states’ vote, then each chamber subsequently votes independently on the merit of the objection raised. If both chambers agree, the objection can be upheld and the vote in question voided. After this procedure, if both candidates tie or fall short of the 270 electoral college votes, the House votes in the president and the Senate the vice president. So yes, it is possible to have a Biden-Pence administration! Further yet, deadlock in the House on the presidential vote would mean the vice president stepping in as acting president, and a deadlock in BOTH the House and Senate on the president / vice president decisions (think filibuster) would put the Speaker of the House, Nancy Pelosi, in the Oval Office.

Now, is anyone currently under the impression that a Pelosi mandate is in the cards? Doubtful. But it goes without saying that much can happen in the next 3 months. Stepping back and taking an objective view at the situation leaves room for a lot more uncertainty yet. As markets digest one scenario and the next, there could be meaningful swings in all directions. 

Unsurprisingly, the news of a Biden win was marginally positive for risk assets (equities and commodities were both slight stronger, while the dollar was a touch weaker). However, the fact that we didn’t see a more substantial move is reflective of three factors. Firstly, Biden was had been likely to get past the 270 electoral college votes needed to claim victory (he had 264 when markets closed on Friday) so that news was already largely priced in. Secondly, markets remain nervous about Trump’s legal challenges and the uncertainty that will bring over the next month. Finally, as shown yesterday, market attention is heavily focused on the pandemic.

In prior week’s we have discussed why we don’t think it’s a foregone conclusion that the dollar will weaken going into 2021 and for now, that view appears justified. Ultimately, clarity over the election result, coupled with a vaccine to combat COVID should be positive for risk assets (and therefore negative for the dollar) but for now, both could still be a little way off.

Author: Caleb Thibodeau