Economic Weekly: US election: Clear result could still be on the cards

There are a few bits and pieces of domestic data out this week, but there’s really only one game in town: the US elections. After an eighteen-month campaign, the wait is nearly over, as we look to find out whether President Trump will spend four more years in the White House, of whether he’ll be defeated by his challenger, Joe Biden. The results will trickle in from around midday Wednesday NZT onwards, but how soon we’ll know the outcome will depend on how close things end up. If it’s a landslide, that should be apparent on the night, but with an unprecedented number of votes-by-mail that will take a while to count, we might be waiting a while longer if its closer. That means it’s important to be careful when reviewing the returns – Reuters warns of a ‘red mirage’, with early returns favouring President Trump’s Republican Party, before mail-in ballots favouring Biden’s Democratic Party come in.

A drawn-out result could trigger considerable volatility everywhere from bonds and equities to commodities and FX. With President Trump refusing to commit to accepting defeat, and the prospect that things could end up in the courts, it’s not at insignificant risk. The last time we had an unclear result, back in 2000 (Bush v. Gore), there was quite a lot of choppiness on Wall Street, which in turn led to volatility on the NZX (see chart below). Still, we shouldn’t overestimate the chances of an ambiguous result – there is a good chance of a clearer outcome.

Indeed, the most likely outcome is still a comfortable win by Biden. Everyone remembers the shock in 2016, but there are a few reasons to believe an upset this time is a bit less likely. Biden’s lead is wider than that enjoyed by Hillary Clinton three years ago (and ahead of the margin he probably needs to win America’s convoluted electoral college system). The polls have been much more stable this year too, with some pollsters and modellers also adjusting their methods to fix things that went wrong last time – like the failure to weight their samples by education, or account for correlations in errors between states. The Democrats are also (widely) favoured to hold onto the House of Representatives and (more narrowly) favoured to win control of the Senate. Remember that whatever happens, the new President and Congress won’t be sworn in until January, so the prospects for a new stimulus bill any time soon are still far from certain.