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One thing Tuesday's chaotic debate did make clear is, in the event of a contested election, neither candidate intends to back down.
That means we could experience a long, drawn-out contest of the Nov. 3 election results.
Now, however you'd like that contest to turn out, whether you'll be thrilled with the result or disappointed, as an investor, you're going to have to come to grips – and quickly – with how such a contest will impact the markets.
Fortunately, we have some strong, compelling clues that will tell us what the market will do and how far it's likely to go. That gives us everything we need to make an inexpensive trade that I think is likely to double…
America's Been Here Before
When it comes to contested election results, we have no less than four to go on.
There was the 1800 presidential election, which ultimately proved to be a contest between Thomas Jefferson and Aaron Burr, who tied at 72 Electoral College votes each. Per the Constitution, the vote went to the House of Representatives, where, after six days and 36 rounds of voting, Jefferson was dubbed the winner.
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In 1824, Andrew Jackson won a plurality of the national popular vote and 99 votes in the Electoral College, but came up 32 votes short of a majority. John Quincy Adams was runner-up with 85, and Treasury Secretary William Crawford had 41. The 12th Amendment required the House to consider only the top three vote-getters when no one commands an overall majority. The House chose Adams over Jackson.
The 1876 election, barely 11 years after the Civil War, between Ohio Republican Rutherford B. Hayes and New York Democrat Samuel J. Tilden, was the last to require congressional intervention, but not the last contest.
Tilden won the popular and Electoral College vote, but Republicans challenged the results in three Southern states, all of which submitted certified results for both candidates. A new, bipartisan Electoral Commission of Representatives, Senators, and Supreme Court Justices voted along party lines to award the contested ballots to Hayes, clinching the White House for him by a single electoral vote.
The next contest, though, is the most instructive for us; it's pointing us in the direction of a trade, in fact.
As many of us remember, there was the 2000 election between Democrat Al Gore and Republican George W. Bush. The Florida vote count became too close to call, and ultimately, the U.S. Supreme Court, in two rulings, one of which was along party lines, declared that the Florida recounts were unconstitutional and that time had run out to devise any remedy. With Bush ahead, the process stopped, and Gore conceded, ending the drama on Dec. 15, five weeks and three days after Election Day.
The markets, which abhor uncertainty even on a good day, had a rough five weeks and three days. But there's an important lesson here…
Markets Took a Tumble in 2000
Markets didn't like waiting. The S&P 500 tumbled more than 8.3% between the Nov. 7 election and its conclusion on Dec. 15. The Dow fell more than 2.7%, and the Nasdaq, already undergoing the dot-com collapse, shed more than 22% over the same time frame.
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The narrow nature of the Dow and the extraordinary nature of the dot-com collapse means, of the three, the S&P 500 has the most to teach us about what we could expect over the next few months.
We're starting to get strong signals that the market would turn in a similar performance should such a contest unfold after the Nov. 3 election.
Financial thinkers are already starting to think hard on it. In a MarketWatch article, "Why stock market investors are starting to freak out about the 2020 election," Longview Global Advisors president D.J. Peterson outlined some of the risk scenarios he's studying:
- Voting results delayed past 48 hours (to a 72-hour maximum).
- Trump claims the vote counting process and/or certified results are "rigged," or fraudulent.
- Left- and right-wing groups converge on election offices with police caught in between.
- Left- and right-wing groups clash in the streets of Washington, D.C.
- Trump calls out the military to restore order – or protect the White House.
- The military is perceived as defending Trump; the military is politicized.
Equity markets have history to go on, just like we do. In the event of a contest, there will likely be a bout of selling and profit-taking, and it will probably be similar in scale to the 8% sell-off the S&P 500 experienced in 2000.
That tells us a lot about the right move to make – and this will tell us about when to make it.
Stocks and futures swooned on Friday with the overnight revelation that the President and First Lady received positive COVID-19 diagnoses and would be quarantining, but the market was trying hard to catch a bid, and those losses were beginning to reverse at midday. That's likely because there are brightening hopes for a stimulus package being agreed to and enacted before the election.
Taking all of that into consideration…
Here's the Smart Move to Make
The market and history are both telling us to buy puts on the SPDR S&P 500 ETF (NYSEArca: SPY), specifically, SPY Nov. 20, 2020 $300 puts.
Now here's why…
If investors are going to head to the sidelines, they'll start moving that way before Election Day. And they're likely to sell more and more when it emerges that whatever the result is, it's being contested. The Nov. 20 expiration gets us into position much more cheaply than the Dec. 18 or Dec. 31 expiries.
No mystery as to the strike price: $300 is 10% lower than where SPY is trading right now.
No matter how you feel about your candidate, or the other candidate, it's just plain good sense to position yourself for what seems inevitable.
If we're wrong, which, at this point, seems possible only with a clear Nov. 3 evening landslide in either direction, we're out a few speculative bucks.
But if we're right, as seems more likely, we can protect our money and make a bundle. I'd expect to turn a 100% profit on this position if I were you.
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.