Widespread voting by mail could lead to another US election result delay. What will this uncertainty mean for equity factors and the market?
Market volatility could be significant if election results are delayed this November when President Donald Trump faces Democratic candidate Joe Biden at the polls.
Covid-19 measures mean that there will be a big increase in postal 'mail-in' ballots this year, with voters unable or unwilling to travel and congregate at polling stations.
The need for mail-in ballots to be gathered and counted manually means it is likely the election result will be delayed.
In the 2000 George Bush vs Al Gore election, we had to more than a month after the ballots were cast to know who would be the next president.
Markets could be set to face a similar - or extended - period of uncertainty this November. So we looked at how factors performed in 2000, to see how stocks might behave this time.
In 2000, votes for the US election were cast by the 7 November with the result known on 12 December. During this time, low vol (stocks that are less volatile than the broader market) outperformed.
Momentum stocks, whose prices tend to follow an upward trajectory, did badly. High vol stocks, that are more volatile than the broader market, also underperformed alongside small cap.
Technology company Tesla and retailer Kroger are examples of momentum stocks.
When voters were going to the ballots in 2000, the market was in the middle of the tech bubble collapse and November was the low point that year.
The additional election uncertainty boosted low vol stocks. Low vol - defensive stocks in real estate, utilities, and industrials - lost less than 3% in the month of uncertainty.
The overall market fell much more - 10%. But, once the result was declared in December, low vol stocks dropped and continued to underperform the market.
With investors waiting to find out what the monetary, fiscal, regulatory, tax and economic landscape would look like in 2001 and beyond, Momentum stocks lost badly.
But once the election result was clear in December, they bounced back and outperformed.
Today, if a similar pattern emerges that would mean a boost for stocks like Docusign and T-Mobile. Small-cap stocks, which tend to overlap high vol stocks, also underperformed but came back fighting in December 2000.
So where are we in the presidential campaign today?
We are almost 100 days out from the election and much can change. The polls currently show that the US electorate favours Biden and that President Trump's popularity is falling.
Some even think the Democrats could emerge with both the Senate and the House of Representatives. The markets are already pricing this in.
If Joe Biden's lead solidifies and creates more certainty about the election result, then the story ahead begins to look quite different for factors, with most stabilising.
That means continued outperformance of high vol, small-cap, and momentum stocks into 2021.
That said, investors should be cautious of assuming a Biden victory this far out, and Trump's campaign is far from over.
Protracted uncertainty will bruise this market's current factor winners, as it did 20 years ago.
Damian Handzy is head of research at Style Analytics