Just a few more days and we will know the result of the US Presidential elections. The polls tell us Biden will win, and my emotional side says he will (and wants him to). But my rational side says it’s too close to call. And even if Biden wins, Trump will cause mayhem.

Anyway, by Wednesday or Thursday, we should have a better fix on the result but in the meantime, it’s worth chewing through what impact any result might have on markets – and the changing perceptions of risk.

Bath-based financial consulting firm CheckRisk release occasional reports, all of which are an excellent snapshot of what investment committees worry about, the latest of which is called the CREWS Early Warning System, Special risk report.

It’s a good summary of what I suspect is conventional financial wisdom, where the “the fan plot of outcomes for both the downside and upside has widened, with our [CheckRisk’s] view being a skew to the upside.”

Which is probably my default position. Overall they think a Biden win is more likely – they report that Biden is currently favorite in all of the nine organizations used in the ‘270towin’ consensus average, with a probability over 85% in statistical forecasts by FiveThirtyEight and the Economist, and 64% in Predictit’s prediction markets. But they highlight what for me is a real risk – litigation by either side. “Though the chances are small, about 1 in 20, they are not negligible. A month or more of court cases, akin to 2000, is not out of the question and would be the most negative outcome for equity prices.”

The helpful graphic below sums up the likely scenarios.

ChekRick’s bottom line?

“In brief, the most likely outcome is the calming and positive effect of a reduction in uncertainty. It is expected that the new President will be known sometime next week, and fears of long litigation will be put aside. Longer-term, the candidates will plot out starkly different paths for the US economy. A Biden victory, with a supportive Senate, will see a significant economic stimulus that could drive growth in the medium-term and introduces the risk of tax increases in the future. The additional growth that will come from these more ambitious plans will more than mitigate the drag from  higher tax; however, without the Senate and as much stimulus, the prospects are much less positive for markets. The outcomes will be dependent on drawn-out political battles with the GOP. Meanwhile, a Trump victory will see slower growth and increased structural risks but is on balance benign for markets in the short-term. The desire to preference corporate support over individuals is likely to limit the prospects for inclusive growth necessary to broaden the recovery over the medium-term.”

The Month in markets…

S&P Dow Jones has just released their monthly reports for major stockmarket indices in October. For the month, 12 of the 50 markets gained, up from 11 gainers for the prior month (and down from 42 the month before that), while the U.S. performance was on par with global markets for the month. According to the index firm, sector variance decreased, as two of the 11 sectors gained for the month, compared to last month when all 11 sectors declined; there were 10 gainers the month before that.  The spread between the best (Communication Services, 1.52%) and worst (Energy, -5.55%) sectors for the month was 7.07% (the one-year average was 10.54%), down from last month’s 11.35% and down from the prior month’s 13.39%.

Intriguingly Emerging markets outperformed, posting a 1.94% gain for the month, after last month’s 2.36% decline and the prior month’s 2.53% –  the year-to-date return is -2.28%.  “Indonesia did the best, adding 8.98% for the month, though it remained down 26.99% year-to-date and down 25.07% for the one-year period.  The Philippines were next, up 7.93%, down 15.58% year-to-date, and down 17.46% for the one-year period, followed by China, up 4.80%, up 20.08% year-to-date, and up 31.63% for the one-year-period.  Poland did the worst, as it declined 14.74%, bringing it down 32.35% year-to-date and down 32.63% for the one-year period.  “

Sticking to Europe, UK and Germany were the laggards. The S&P Europe 350 dropped 5% on the month, breaking out of a narrow trading range which had held since May. The S&P United Kingdom declined every day in the final week of October to finish the month with a loss of 5%, the worst monthly performance for U.K. equities since March [my emphasis added]. By contrast, the star performer was boring old Luxembourg. Who’d have thought…

Looking at Europe wide sectors, “the S&P Europe 350 Information Technology plummeted 11%, primarily on the back of lacklustre earnings results from the region’s tech champion, SAP. Energy followed closely behind, declining 8% despite surprise Q3 profits from European oil majors”.