Equities: New extremes and a challenging opportunity set
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Head of FX Strategy
Summary: We are barreling toward the macro event of the year, the US Election on November 3rd. This is the first in a daily series of articles through US Election Day. Today a few thoughts on what the latest polls are showing, how to read the inevitable skew in the early results on Election Night for both parties, depending on the state, and a spotlight on a frenzy of early voting activity in Texas.
This is the first in a daily series I will run through Election Day next Tuesday and for as many days after that day that are necessary until a result is clear. Today I look at:
Tomorrow I will look at the impact of different US election outcomes on key markets, especially the US dollar.
Key resources: the 270toWin website is a great resource for interactive, click-and-tally scenarios around US election outcomes. Note that the crazy US electoral college system is different for Nebraska and Maine. These two states allow split representation in the electoral college (1 vote per House district and then 2 votes for whichever party ever won the state popular election at large).
Another early voting tally resource is the great US Election Project site, maintained by a University of Florida professor.
The latest polls…Biden still in commanding lead nationwide, less clear in some battlegrounds.
One of starkest contrasts in the polls this time around relative to the 2016 election is the stability of national polls, which have showed a gentle widening and then undulation back and forth of Biden’s commanding lead in recent weeks. It is hard to believe that this will change much in the final week, after both sides have tried to dig up their nastiest mud-slinging efforts. The Democrats have attacked Trump on his tax-paying record and accusations of maintaining China-linked bank accounts and property transactions. Republican partisans have chiefly mobilized a feeding frenzy around Hunter Biden’s activities in Ukraine and whether Joe Biden had knowledge or involvement in those activities. It hasn’t mattered much for the polls. Basically, if Trump wins this election despite Biden’s current edge in the polls, we have to wonder why the polling industry even exists.
The polling in individual battleground states is far more confusing, but still suggests a sufficiently wide Biden edge in a key states (in particular Michigan, Wisconsin and Pennsylvania) to send him over the top. Still, some of the recent Pennsylvania polls have been wildly different and Biden’s lead is similar in size to Clinton’s lead in that state in 2016 (which she lost by a razor-thin margin). Elsewhere, on the other hand, mixed evidence in polls suggesting that Biden is competitive in Arizona, North Carolina and even Georgia and Texas. If these last two go Biden’s way, we are set for a Biden landslide, particularly if the game-changer this time around is general voter turnout among young voters (more on that below on the coverage of Texas early voting.) The spectrum of possible outcomes run from a weak Biden win (Senate remains Republica) to a Biden landslide with strong, two or more vote majority in the Senate. I won’t cover the “contested election” scenario here, but the odds of that are obviously much higher if margins are close in battleground states.
What it means: the national election is Joe Biden’s to lose and he will likely be the 46th President of the USA. The Senate picture is possibly another matter if the polls are erring too far to the Democrats side and is the only real prize at stake in this election. The Senate outcome (currently 53-47 Republican, with 35 Senate races at stake) is so critical as the Democrats must also have control of both houses of the US Congress for any Biden platform initiatives to have any chance of seeing the light of day. The polls in some battleground states are arguably close enough to mean uncertainty reigns here, but a 51-49 Republican outcome is possible even if Biden wins. It will be important to follow Senate races even if it quickly becomes clear that Biden will win the presidency fairly early.
What is going on in Texas early voting?
Something is going on in Texas, and that something is a tsunami of early voting. As of Sunday, nearly 7.4 million Texans had already voted in this election, more than 82% of the total from 2016. (Nit-picker will note that Texas population has grown some 8% in the last four years). If early voting continues at the current pace, that figure could be up to 100% - before election day even rolls around, when presumably another 2-3 million will cast their vote next Tuesday. Texas is normally not a focus at all in US presidential elections even if it is the second largest US state in population and in electoral votes (38), as it has consistently voted Republican for decades, last going to Democrats in 1976, i.e., even going Republican through 4 Democratic wins under Bill Clinton and Barack Obama.
Texas was touted as a possible battleground state in 2016 but went heavily Republican after all – to the tune of 9% in favour of Trump. There was a bit of fuss this past weekend when at least one poll showed Biden competitive and possibly leading in Texas, though most polls suggest Trump has a 4-5% lead, still within the real margin of error. Now, before we put Texas firmly in the Republican category or even battleground state category it is important to understand what is going on, and we don’t know yet: is this a surge of younger voters who tend to favour Democrats, or is it the fact that the state is touted as suddenly in play that the marginal Republican is motivated to get out and vote? Texas has one of the lowest turnout percentages in the US, in 2016 at fourth from last at barely over 50%. Who is that marginal additional voter if the participation rate rockets to what it seems likely to do this time around: to a level closer to the national average – perhaps 60% or even higher?
What does it mean? Nothing yet, and so many pundits are telling me to ignore the early voting data – but I simply can’t in this case. There is huge voter engagement in Texas, and I prefer to connect higher voter turnout this time around with a stronger youth vote and higher Democratic lean than the polls might be suggesting. Texas is a young, diverse state with a low voter turnout history – suddenly rocking the vote there may mean a shocking Democratic win if the pollsters got the “likely to vote” part of the polling equation wrong in Texaas just like they got that equation wrong for midwest white traditional non-voters in 2016. As a native Texan, I am maybe 30-70 on the odds of this state going for Biden (30% likely, but let’s be honest, I’ve no idea – just very impressed with the turnout and will be laser-focused on this state as results start coming in). More importantly, if Texas goes Democratic, we are talking about a Biden and Democratic win of epic proportions that means a generational shift in US politics and the end of the Trump/Republican “party” as we currently know it.
Election night: some states will have a blue sunset and red dawn, not the other way around!
I will write a thorough update on how election night will unfold on Monday if not on Election Day itself next week, but it is worth flagging this now because the topic has already seen considerable coverage in the press, with most fretting the risk of a “Red Sunset, Blue Dawn” scenario in which Trump could inject all manner of mischief with accusations of fraud as heavily Democratic mail-in votes tallies roll in in the late hours and even day(s) after the polls close – shifting what initially appears to be a Red/Republican Sunset into a Blue Dawn in the early hours of Wednesday, November 4, and in the closest states, even for a week or more after.
We will likely see this Red Sunset / Blue Dawn pattern in states with heavy mail-in voting where they aren’t used to processing mail-in votes in prior elections and are not allowed to even open those votes and begin tallying them until Election Day. Battleground state Pennsylvania is a lightning rod state on the showdown on mail-in voting issues and counting. And can you believe it: Pennsylvania, Michigan and Wisconsin – the very three states that gave Donald Trump the win in 2016 with a total plurality of 80k votes – are expected to be particularly slow in reporting results this time around and could be some of the worst among battleground states in showing the Red Sunset-Blue Dawn pattern. Pennsylvania, unlike most states, has absolutely no early, in-person voting. (By the way, the reason so many mail-in votes are Democratic is that the Covid-19 pandemic has been so heavily politicized in the US that many Republicans take Trump’s stance on being dismissive of the virus, while many Democrats have taken the opposite attitude toward the disease.)
However, it is important to point out that we could have the complete inverse of this phenomenon in other states – most importantly in Florida, where polls close early in the night – as early as 19:00 Eastern US time for the most populated areas of the state. There, far more Republicans are likely to vote on Election Day and see their votes tallied and reported after the heavily Democratically skewed mail-in voting (where ballots can be opened and processed 22 days before Election Day). Early voting is a factor in Florida as well, though it is less clear how partisan the lean in early in-person voting will be. Enhancing the timing issue for Florida, the polls in the state that close an hour later are very heavily Trump-leaning counties.
What to do? (And a warning note). Know which states will show which patterns and don’t take an incredible edge for the Democrats in Florida as early results come in, if that is what we see, at face value – wait a bit and then wait some more. (Florida was won by Trump in 2016 by a slim 1.2% margin – with a big shift in the last 10-20% of the vote counted. North Carolina may be out with heavy early results of a similar pattern – this is a battleground state that Trump won by a 3.7% margin in 2016.)
One early activity on election night will be on the county-by-county level results of Indiana, one of the first states to see some of its polls close at 18:00 Eastern Time. Vigo County, Indiana (part rural, part modest-sized manufacturing town Terra Haute) has picked the winner in every election since 1956 and saw a clear and very large big shift to the red in very early results in 2016 on Election Night. Since Indiana Governor Pence is repeating as VP candidate this time – that factor has not changed relative to the 2012 to 2016 shift. And now for the warning note: a lot of old folks are voting early by mail in the US, and likely not just Democrats. That’s for obvious reasons, as Covid-19 hits the elderly far harder than the young. Anecdotally, I have seen reports of heavy mail-in participation by elderly in one state. Older voters skew toward Trump – this factor could further complicate the situation. More later.
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