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2020 Election Preview: What Happens If…

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Now that the race for the White House is less than a month away, we are providing an “Election Preview” that details three possible scenarios: Trump Presidency with a Divided Congress, Biden Presidency with Democrat Congress (A Blue Wave) and No Clear Winner.

We wish to make it clear that our view for this post is through the lens of what the “market” expects from Washington. Our political opinions are not relevant to this piece and we are not implying a personal preference for any of these outcomes.

Scenario One: Trump Wins and There is a Divided Congress.

There is virtually zero chance that Republicans re-take the House, so even if Trump defies the polls again and wins, he is almost certainly going to be working with a divided Congress.

Likely Policy Implications: Not much. Think of the last two years of the Obama administration and the last two years of the Trump administration. Large policy initiatives are virtually impossible to pass in today’s partisan environment with a divided Congress, so essentially this outcome would be ensuring the “status quo” for the next two years, from a domestic policy standpoint. From an international standpoint, this means more trade war noise. With no looming re-election, we should expect the trade war with China (and other regions) to heat up substantially, and so we should prepare for more intermittent volatility regarding tariffs and trade war rhetoric.

Potential Market Reaction: Knee-jerk rally, based on the relief of no tax increase or minimum wage increase. Tech may continue to outperform while cyclicals lag (just like the last four years). Little change expected for the dollar or 10-year Treasury yields.

Scenario Two: Biden Wins and Democrat Congress (aka “Blue Wave”).

Based on the polls, this is now the most likely outcome of the election, although because the polls were wrong in 2016, they are being viewed with more skepticism than usual.

Likely Policy Implications: Significant. We would expect: 1) Corporate tax increase, 2) Minimum wage increase, 3) Increased regulation across industries but especially energy and financials (and perhaps Big Tech) 4) Expansion of Obamacare.

Potential Market Reaction: Knee-jerk declines, based on expected tax increases and minimum wage hikes. The potential sell-off is broadly driven by two stated Biden policies: Raising the corporate tax to 28% from the current 21% and raising the national minimum wage to $15/hour (from the current $7.25). Both policies would reduce corporate earnings, as increased taxes would directly reduce earnings-per-share while increased minimum wage would compress margins for companies in specific sectors (especially hospitality).

Both policies also have social benefits, of course, but our lens is on the immediate investing impact. Stock prices are reflective of future earnings. If future earnings are expected to go down (because of higher taxes or lower margins) then stock prices would likely go down, at least initially. Over the longer term, markets have often performed well during Democratic administrations, but in the near term the market will worry about higher taxes and lower margins.

Our Take on Scenarios One and Two:

Positively, we do not see either immediate election outcome (Trump win or Biden win) as a bearish gamechanger, regardless of who controls Congress. Yes, in the near term we can expect a Blue Wave will create more short-term volatility, which might impact market returns for 2020. However, the reality is that even when one party is in control of Congress and the White House, meaningful change is hard to affect. Case in point, it took nearly two years for Democrats to pass the Affordable Care Act, and they had strong majorities in Congress and the White House. Similarly, Republicans failed to repeal Obamacare despite controlling Congress and the White House, and it took two full years to pass the Tax Cuts and Jobs Act.

Beyond policy, we think the bigger medium-term drivers of market performance will be Fed policy (do we get more quantitative easing?) and stimulus (does the economy get more stimulus before year-end or early 2021?). Yes, policy decisions will impact the markets over the years, but we will cross those bridges as we come to them.

Bottom line: We view neither Trump nor Biden as bearish gamechanger for anyone with a time horizon stretching into early 2021 and beyond (but again, we acknowledge potential short-term volatility into year-end).

Scenario Three: No Clear Winner Emerges on Election Day and the Election is Contested.

The concern over this outcome stems from an expected historic number of mail-in ballots in multiple states due to fears of contracting COVID-19 at polling places. The number of mail-in ballots could be so large that they 1) Prevent a state from being called for one candidate or the other, or 2) “Flip” a state that had previously been called once all the mail-in ballots have been processed.

The real risk for markets materializes if we don’t know the election outcome until mid-December. Other than creating confusion over future policy expectations, an election drama will likely consume Washington and prevent stimulus from being passed, potentially pushing back that legislation into early 2021, or until the new Congress and president are seated (January 20, 2021).

Potential Market Reaction: “Risk off.” While markets know a contested election is ultimately a temporary phenomenon, that won’t stop the knee-jerk selling. A sharp drop in stock prices is possible. Treasury yields could sink, while the dollar reaction would be more mixed (we could see capital flow into the dollar despite the election chaos on a risk-off move).

Dates to Consider: The most important date to know is December 8, because that is the day when states must resolve any election disputes. December 14: Electors in the Electoral College cast their ballots for the presidency. January 6, 2021: Congress counts the electoral votes and a winner is declared. From a reference standpoint, the Bush vs. Gore drama ended on December 11 with the Supreme Court ruling that Florida’s 25 electoral votes should remain with Bush, effectively delivering the presidency.

What is the Probability of a Contested Election?

Perhaps we are being optimistic, but we view the probability of a contested election as much lower than the slowly building media hysteria would imply. Here’s why.

If the election is going to be close, it will come down to the results of a handful of swing states: Florida, Wisconsin, North Carolina, Michigan, Pennsylvania, and Ohio. Of those six states, four (Pennsylvania, Wisconsin, Florida, and Michigan) have Election Day deadlines for all mail-in ballots. As a result, there likely won’t be a “wave” of mail-in ballots that would cause any major surprises in those states.

North Carolina and Ohio allow mail in ballots to be received three and 10 days after the election, respectively. There is the potential for a reversal days after November 3, but for that reversal to occur, the election results would have to be very, very close. For there to be a recount where the mail-in ballots would be contested, the margin of victory needs to be less than one half of one percent (or 0.50%).  Recall that in 2016, only two states fell within that threshold, Michigan (0.3%) and New Hampshire (0.4%). Most results, even in battleground states, saw a margin of over 1%.

Bottom Line: Most elections can’t be challenged (at least not legitimately) unless there’s a recount. For there to be a recount, the margin will have to be less than 0.5% in most of the swing states, and those swing states will need to represent enough votes to turn the election. That is not impossible, but it is very unlikely, and simply not a high-probability event.

But hey, it’s 2020, so anything is possible! 

Regardless of which scenario occurs, one thing is certain: we will be here to support you and help you make decisions that put you in the best position to reach your long-term financial goals.




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Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.

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