Widespread voting by mail could lead to another US election result delay. We studied factor performance in 2000 when the Bush vs Gore election result was delayed.

• In November 2000 Low Vol stocks did well, Momentum did badly
• History suggests a similar delay in November would see High Vol, Small Cap and Momentum stocks suffer then rebound in December
• If Biden continues to lead the polls, High Vol, Small Cap and Momentum may do nicely in December

Market volatility could be significant if election results are delayed this November, due to the increase in mail-in ballots and the need for these to be gathered and counted physically. With the possibility of a month of uncertainty, we looked at how factors performed during the 2000 Bush vs Gore election result delay, to see how they might behave this time around.

In November 2000 US markets fell 10% and in December 2000 they rose 1.5%. The table shows how factors behaved in descending order of performance.

Factor performance in the 2000 US Bush/Gore election

The election took place in the middle of the Tech Bubble collapse, and November was the worst month of that crash so far. Uncertainty created by the election result delay saw Low Volatility stocks – those with small variations in their daily price movements and low sensitivity to broader markets – outperform other stock factors. The market fell 10%, Low Volatility lost just 1% to 3%. But these same ‘lower risk’ stocks did poorly the following month, underperforming the market by 3%.

Momentum stocks, whose prices tend to follow a typically upward trend, were the biggest money losers in November 2000 hit by uncertainty about incoming regulatory, fiscal, monetary, tax and economic policies. But once the election result was clear in December, they bounced back and outperformed. Small Cap stocks, which often tend to overlap High Volatility stocks, also performed poorly in the month of uncertainty but came back stronger in December 2000.

Markets hate uncertainty. So, this created a favorable environment for defensive stocks in November 2000.

So, what about 2020?

Joe Biden is leading in the polls and markets are now pricing that in. If this greater market certainty endures, we can expect more stable factor performance in the lead up to November 3^rd with continued outperformance from High Volatility, Small Cap and Momentum into Election Day and beyond.

*According to Predictit.org, a leading elections trading market, Biden surpassed Trump as the odd-on favorite on May 29 and now has a large lead over the incumbent, as shown in the figure below