With the first Trump-Biden debate of 2020 in the books, we’ve headed into the final stretch of the 2020 election. Let’s note the election risk and then look at how to protect against it.
A couple of weeks ago, a Finnish business journalist asked me which candidate would be worse for the market. I told her that the risk in the near term wasn’t either candidate winning, but neither candidate winning: that the best thing for near term returns was a decisive election night victory. In a Wednesday article (“As Election Looms, Investors See Uncertainty. They Don’t Like It.”), investment professionals interviewed by the New York Times made similar points. For example:
“The single biggest comment that I hear is, ‘I want an election, I want a result of an election that is so clear that it can’t really be contested,’” said Doug Rivelli, president of the institutional brokerage firm Abel Noser in New York.
In the same article, Steve Sosnick, chief strategist at Interactive Brokers, raised the prospect of force being used to decide the issue:
I can’t remember a time where U.S. citizens had to worry about whether there would be a peaceful transfer of power, and whether all parties would have any doubt in accepting the electoral results.
Hedging Election Risk
If you’re concerned that chaos might escalate after an unresolved election, below is a way you can limit your risk.
In that video, we use optimal puts on QQQ as a way to hedge market risk, for a tech-heavy investor. Investors who aren’t as tech-heavy can use a similar approach with other index ETFs such as SPY.