In 2020, a swing of only 43,000 votes in Georgia, Arizona and Wisconsin would have resulted in a tie in the Electoral College, assuming no ‘faithless’ electors – electors who do not vote for the candidate they are pledged to vote for. In 2016, a swap of only 88,000 votes in swing states would have given the election to Hilary Clinton. It was also that close.

In the event of a tie, the election goes to the House of Representatives where each state delegation gets one vote. Trump’s ‘stop the steal’ campaign in 2020 was designed to change or exclude a sufficient number of votes to flip the result, or to get the election into the House of Representatives where the Republicans control a majority of state delegations. The current count is 26 state delegations controlled by the R and 22 controlled by the D with two states even. It is highly likely Trump would have prevailed in a House vote in 2020.

Trump and his allies tried hard to affect the outcome, including the infamous march on Congress on the 6th of January 2021, to prevent the certification vote. More importantly, he tried to get a sufficient number of votes excluded in some states to overturn the outcome. He challenged certain outcomes in court. According to the A-Mark Foundation, there were 82 lawsuits brought, with Trump losing 77 and winning only four plus a ‘partial’. However, Trump’s legal wins were all inconsequential. On those of substance, Trump lost every case.

The ‘received wisdom’ is that America’s Constitutional guard rails worked and prevented an un-democratic (note the lower case d) overturn of the election result. Will the Trumpists try again? There is a real risk that, in 2024, the level of Trump’s ability to subvert the election could be several times greater than in 2020.

In some key swing states, laws have been passed to make it easier to challenge the outcome. Or to exclude voters. Or to restrict access to polling stations. Or to restrict ballots by mail. Or to make early voting more difficult. You’ll find restrictions and curtailments across the voting spectrum, all designed to help Trump. In some key election districts, government departments responsible for overseeing elections have been taken over by Trump-supporters and 2020 election deniers.

For example, according to the NY Times (19 August), in Georgia, an unelected Election Board which shapes voting rules has a new, conservative, majority who continue to question the state’s 2020 result. Since taking control, the Board has approved rules on certifications and investigations backed by right-wing activists who claim the 2020 result was stolen from Trump. These types of insidious changes could have a decisive impact on the 2024 election outcome.

Overall, on current trends, Kamala Harris could comfortably win the popular vote. In fact, this is probably already quite likely, but the Electoral College vote will go down to the wire – and possibly beyond. Both sides are gearing up huge legal teams for various legal challenges, both pre, during and post-election day.

It is likely that it will take days to count the ballots in some key swing states. This will create considerable uncertainty, and uncertainty typically leads to heightened volatility. Then come the challenges. Actually, these will begin on or even before election day. If Harris wins several swing states by narrow margins, there will be challenges of every description. Some states may even refuse to certify the election outcome.

There may also be attempts to encourage “faithless electors”. If Harris has only a narrow Electoral College majority, expect challenges to the Electoral College process – all the way through to early January, when Electoral College votes are certified. In short, unless Harris or Trump win by a landslide, this could be very messy. Financial markets don’t like that.

It is a sad state of affairs, when a win may be insufficient and a trounce be necessary to quiet legal challenges and conspiracy theories. The ongoing implications are also consequential. If Trump were to win through what Harris voters would consider fraud or manipulation, there is a risk of civil disobedience and violence. If Harris were to win narrowly, the risk of civil disobedience and violence is even bigger.

How should investors think about the potential post-election landscape?

So far, Harris’s campaign has been light on policy details. What she has said is centre-left (by US standards) but considerably more centrist than when she ran for President in 2020. For example, she has walked-back her opposition to fracking. Trump policy highlights include higher tariffs, particularly on imports from China, lower taxes and potentially less Fed independence. We will look at the economic policies and potential financial market implications of both candidates as the campaign progresses.

Financial markets will react to the post-election situation in different ways, depending on the actual situation on the ground, which could well go beyond Bush/Gore or Biden/Trump complexity. A peaceful, uncontested, non-controversial transition to a new President looks like the least likely scenario for now. Our bottom line is that, depending on the degree of election-related controversy, markets will either go quiet and/or defensive. Hedging costs will increase, so if you want to hedge for this uncertainly, get your hedges in place sooner rather than later.

Let’s take a middle ground scenario. Lots of bluster, allegations and challenges, hyperbole and threats, but the system withstands the pressure again, and what appears to be the correct result is eventually confirmed. This still means more than two months of uncertainty – from election day to Inauguration Day. Those ten weeks could be both volatile and tempestuous.

The USD will probably strengthen if it looks as if Harris will win (on the back of more public spending and, thus, higher interest rates). If the election goes Trump’s way, it will depend on how serious he is about taking power away from the Fed. Having said that, we will not be able to predict the final result of all the machinations and challenges until we know the outcome. To paraphrase baseball folklore, it ain’t over ‘till it’s over. Hedges and defensive positioning are the places to be.

On top of that, there is a range of more extreme outcomes. Perhaps not a Civil War in a conventional sense but violence in the streets. Hedges and shorts are the ticket (pardon the pun).

In short, democracy in the US is at risk. This election is not your grandfather’s and grandmother’s election. It’s not even your father’s and mother’s election. It is about securing democracy and maintaining a system where markets can operate normally.

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Austin Erwin

27 August 2024