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How Will Energy Markets React To The Election Outcome?

Just in case you have been fortunate enough to have avoided all reference to it up until now, I should point out that there will be an election in America next week. At first, I was going to say next Tuesday, but given that even the timing of a full count of votes and the release of results have become politicized this time around, I erred on the side of caution. If something as uncontroversial as the counting and verification methods for election results that have been the same for a century or so are now partisan, one would assume that the divide on something as controversial as energy policy was absolutely massive.

One would be right.

Everything about these two candidates is different, but their differences on energy are some of the most glaring. Donald Trump has long cast himself as the savior of the traditional energy industries. He has vowed to save the coal and oil industries, to cut regulations and environmental protections that hampered expansion in the oil business, and has often rambled on about how wind energy turbines slaughter birds and cause cancer.

Biden, on the other hand, while he has stopped short of a full-throated endorsement of the “Green New Deal” in its entirety, has pledged to drastically accelerate the transition of America away from fossil fuels. He would fund research in alternative energy and subsidize where necessary to make it competitive. He would re-enter the Paris climate accord and reintroduce some of the regulations that Trump has rescinded.

A couple of weeks ago, in these pages, I took a look at what might happen given all that in the most likely election scenario, a Biden win. That included an initial drop in oil and energy stocks, but then a recovery as it became clear that Biden wasn’t about to destroy the oil industry overnight. There are, however, two other possible election scenarios, so it is worth looking at what might happen in each of those.

The second conventional result would be a Trump win. That looks unlikely based on polling, but, you know, 2016 and all that…

Actually, the situation is completely different now as I pointed out in that previous piece, but what that experience reminded analysts was that “favored” does not equate to “certain”. Right now, according to fivethirtyeight.com, Joe Biden has an 89% chance of winning to Trump’s 10%. That obviously makes it more likely that Biden wins, but it is far from certain.

So, if Donald Trump does pull out an unexpected victory on Tuesday, what can we expect from markets?

Well, the historical data clearly show that while both the stock market and the economy have done better with Democrats in the White House than with Republican presidents, the market always assumes that the opposite will be true. It is that assumption, combined with the surprise element of a Trump win, that would drive a massive jump in markets, most notably stocks and oil, should that be the result.

As we have found out over the last four years, that won’t necessarily be sustainable in the case of oil. Crude is more than 20% lower now than it was the day after Trump’s election four years ago, even with all that regulatory and rhetorical help. History also shows us that stock performance will be far more dependent on outside “black swan” events like a global pandemic or a financial meltdown than it will be on marginal changes to tax rates and regulations.

For traders, though, the long-term picture doesn’t matter. A surprise Trump win would trigger a huge bull run that you could not ignore.

Of course, nothing in 2020 is normal, and the election is no exception. This year we have a third possible outcome: a contested result. Donald Trump has repeatedly said that if he loses, it means the election was rigged, and on that basis, he has repeatedly refused to commit to a peaceful and orderly transition of power should he lose.

He may be the only one voicing that concern, but he probably isn’t the only one thinking it. If the polls turn out to be wrong again and the 9:1 shot in the Presidential Stakes gets his nose in front at the wire, I have no doubts that Democrats will convince themselves that the Russians somehow fixed the race.

Either way, if the result is close, there will be chaos and discontent and conventional wisdom says that isn’t good for markets. You could say that, given the market’s preference for Trump, anything that holds out the prospect of four more years and another big, top-end and corporate tax cut will be a positive. You may be right when rational analysis takes over, but the immediate impact of a virtual tie would almost certainly be a big drop in both stocks and oil as “risk off” became all the rage.

Whatever happens on Tuesday, and if necessary, on the days following the vote, there will be trading opportunities; there always are. My instincts and training in volatile markets usually lead me to look for contrarian trades and retracements of overdone initial reactions, but this time is different. Passion is running so high and the differences between the candidates are so extreme that it is hard to see any quick reversal of initial moves. So, as much as it goes against my nature, I will be all about momentum next week.


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