Why the 2020 election clearly matters to the stock market: RBC

Yahoo Finance's Sibile Marcellus and Akiko Fujita to discuss how the outcome of the 2020 Presidential race could impact markets.

Video Transcript

AKIKO FUJITA: A new report out from RBC points to the correlations between the upcoming presidential election and the stock market, saying the S&P 500 has now started trading in sync with President Trump's odds in the betting markets. Again, let's bring in Sibile Marcellus for a breakdown of that study.

And Sibile, so much of the discussion around the market risk has been about the delay in the election results in what could potentially drag out. But what specifically is RBC pointing to in terms of where the correlation is right now?

SIBILE MARCELLUS: What we're seeing is a correlation between Trump's odds of winning the White House in betting markets and the actual performance of the stock market of the S&P 500. And RBC Capital Markets has this new report out, and they're basically showing in this chart how when President Trump's odds of winning the White House improve, the stock market, S&P 500, also moves up.

And this is very interesting, because national polls indicate that Biden is most likely to win in November, and betting markets actually expect Biden to be able to hold onto that lead come Election Day. But yet, when you look at the performance of the stock market and S&P 500, you see that recently, starting in July, it was in sync with Trump's odds of winning the White House.

Now, it has since dipped. September has been a very volatile month, as we know. Investors have been paying close attention to the elections. And what we're seeing is that as President Trump's odds have dipped slightly in betting markets, the S&P 500 has also fallen, as we're seeing investors deal with that.

Now, looking forward to Election Day, there are three major factors that investors are looking at, because we don't quite know what impact they're going to have on the race just yet. Number one, there is a Supreme Court vacancy. The impact of Senate Republicans pushing through President Trump's nominee prior to Election Day-- what impact will that have, if they're able to do that?

Number two, Trump's fortunes are inextricably linked to the spread of the coronavirus in the country. The more that is in control, the more Trump's odds of winning the White House improve. So we'll have to see how that pans out over the next couple of months towards Election Day.

And number three, there's the possibility-- and investors are 100% aware of this-- that there is a possibility that we won't know who the winner is come Election Day on November 4. There's a possibility we might not know because of President Trump's accusations in terms of mail-in votes possibly being conducive to fraud, and the fact that mail-in votes will be a part of this election.

So if the results are contested, that would likely have an impact on the S&P 500. It definitely did in 2000, when it was a George Bush versus Al Gore. We saw the S&P 500 fall around 12% from the close of Election Day through December 20 at that time.