Boston - It has become a popular cliché to observe that markets dislike uncertainty. It is helpful to have dates on the calendar when decisions are made and uncertainty evaporates. Election Day is presumably one such date.
By early November, investors will know who will control the White House for the next four years, and they will be able to make educated guesses and assumptions about the tax, spending and regulatory policies that will influence the direction of stock prices. Or will they?
With a potentially tight election result, and likely heavy mail-in voting that can take several weeks to tabulate based on each state's vote-counting protocols, it is possible that the winner may not be determined until December — or later! At the end of September, the political prediction markets anticipated a less-than-50% chance of knowing the winner by November 4, the day after the election. And there was a one-in-four chance that the winner would not be determined until the following month.
Since then, as of October 12, the probabilities have shifted to less than a one-in-three chance that the presidential outcome will not be called by November 4 and only a 15% probability that the uncertainty will persist until December.1 Nevertheless, the markets could still be rattled if this uncertainty is accompanied by political unrest and demonstrations.
The opportunity to undertake end-of-year tax planning, potentially including flipping from traditional tax loss harvesting2 to tax gain harvesting (in anticipation of higher tax rates in the future) may occur in an ultra-tight window leading up to December 31, as financial advisors and tax-motivated investors await clarity before acting.
Bottom line: Scenario planning ahead of Election Day is one way for investors to ensure they are making decisions with their heads, rather than their hearts, in what is likely to be a tumultuous end to the year.
1 See PredictIt.org, When will the presidential election outcome be called? as of October 12, 2020. https://www.predictit.org/markets/detail/6871/When-will-the-presidential-election-outcome-be-called
2 Tax loss harvesting is a strategy for managing taxes in an investment portfolio. Selling a security that's trading at a loss creates a realized tax loss, which can be used to offset a capital gain realized in the same year.
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