The Capital Note: Election Trades & Real Estate Troubles
6 min read
fairly difficult
On the menu today: Wall Street braces itself for November, trouble in commercial real estate, and a look at exponential-growth bias.
A real estate sign hangs on a fence in front of a house for sale in Ottawa, Ontario, Canada, August 15, 2017. (Chris Wattie/Reuters)

Welcome to the Capital Note, a newsletter about business, finance and economics.

Wall Street Braces Itself

Investors are gearing up for a shaky election season. Polls and prediction markets suggest a Democratic sweep, but the widespread use of mail-in ballots in key swing states raises the risk of delayed results. Trump has refused to commit to a peaceful transfer of power, while Hillary Clinton has advised Biden not to concede under any circumstances.

As we've discussed previously, October and November VIX futures imply an unprecedented spike in volatility around November 3. The immediate concern is that a contested election would catalyze a sell-off in financial markets, which, in the event of social unrest, could persist even after a victor emerges.

Wells Fargo strategist Christopher Harvey told CNBC that a contested election would push stocks down 10 percent, a risk that has depressed equities in recent weeks. And Harvey is not alone: His view reflects a market consensus, according to the Wall Street Journal:

Whether fueled by a slow or contested counting process, futures and options prices show that an ambiguous election result is now the stock market's baseline expectation, while those tied to Treasurys and gold are signaling one of the most active Novembers on record, traders said.

While the short-term outlook is perilous, the long-term economic effects of the election are less clear. A Biden administration would likely stimulate the economy through increased deficit spending, but the Democratic nominee's proposed tax hikes and new regulations could outweigh the effects of more spending. Goldman Sachs analysts estimate that Biden's tax plan would decrease corporate earnings by 12 percent. On the other hand, trade tensions, which weighed on markets through Trump's first term, would likely recede under a Biden…
Daniel Tenreiro, Andrew Stuttaford
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