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Forget the VIX, we’re not looking at a repeat of the 2000 election

David Stevenson, 29/10/2020

With the US presidential election imminent, market forecasters have been using all their tools to decipher what’s going to happen to the markets immediately after. Looking at the VIX, otherwise known as the ‘Fear Index’ and an indicator of volatility, it looks worrying similar to how it did in 2000. This was before the dot.com bubble burst which heralded in a deep recession, but are the similarities a harbinger of bad news or are there other things at play?

Esty Dwek, head of global market strategy at Natixis Investment Managers, told fundeye that the tech sector is in much better shape than it was in 2000. The large players, or the FAANGs, are seeing quarter-on-quarter growth and their outlook is much stronger. “I don’t think the two situations are comparable,” she added.

However, given recent past election results, what would happen if there was a contested election, it’s a given the markets hate uncertainty? Jack Janasiewicz, portfolio manager at Natixis Investment Managers, said in his view that it was unlikely there would be a contested election on the presidential side but more likely over the formation of the Senate. He said: “I want to make this real simple. If Trump doesn't carry Florida, the math to get to the White House is very difficult.”

Getting back to the original question on similarities between 2000 and today Mr Janasiewicz had quite a bit to say.

“If you look back at what happened in 2000, the knee jerk reaction was a sell off, I think the S&P sold off somewhere in the range of five to seven [percentage points]. But keep in mind that backdrop was a little bit more shaky only because we were about to go into a recession. So a little bit of the economics is on the back of that makes it a little bit tougher to discern. But my expectation would certainly be a knee jerk reaction, soft equities, you're gonna have a rally on safe haven assets like gold and treasuries [in the aftermath of the election],” said Mr Janasiewicz.

So while there are certainly major differences in the constituents of the major US indices from today and 20 years ago, behavioural finance suggests that investors will react in a similar fashion when faced with uncertain times.

The big difference

What separates the upcoming US election from any preceding it has been the pandemic and equally important the government response to it. Ms Dwek said, “fiscal stimulus is coming. Markets aren't thrilled if it takes longer. And again, if we get a split Congress, and not the massive spending we're expecting if the democrats win they’ll be a bit of disappointment”.

The election seems to be centred around fiscal stimulus, it’s coming but in what form is what the new president will determine. The Natixis employees deemed it Maine Street versus Wall Street, or in taxation terms, will the ultra wealthy foot the bill or will blue colour workers have to pay for the measures.

Ms Dwek portrayed Mr Biden as the protector of the working man. “He [Mr Biden] really believes that higher earners should be paying more taxes and that a lot of these companies shouldn't be managing with all of these [tax] loopholes. And he probably isn't going to delay,” she said.

But here’s where reality might intercede on ideological beliefs. Given that Mr Biden plans to spend anywhere between $3 to $5 trillion on a range of policies including a large move towards a greener economy, this is going to have to be funded somehow. While the 2022 mid-terms seem someway off, in politics it’s not and raising taxes is always a difficult decision, for instance see the reluctance on using fiscal measures in Europe despite options being exhausted as parties simply don’t want to run on a ‘raise taxes’ banner.

For Mr Janasiewicz, given the multitude of moving parts in the upcoming election, he underscores the point that ‘there will be a resolution’. When considered alongside his prediction that there will be a sell-off in equities, his conclusion is “that's a buying opportunity in my opinion”.

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