Executive Edge

Worried about contested election? Here’s what went down in stocks during 2000 Bush-Gore battle

Key Points
  • The presidential election of 2000 occurred amid a dotcom bubble bursting, interest rates rising and weak earnings from bellwether stocks like Apple and Bank of America.
  • The 2020 stock market features near-zero interest rates, and a dominant position in the S&P 500 for Apple and the tech sector more broadly.
  • But one thing is likely for investors: volatility.

In this article

History suggests a contested election could contribute to market volatility
History suggests market volatility in a contested presidential election

The last time there was a contested presidential election, the S&P 500 and technology stocks tanked. Can it happen again? 

Many Americans are wondering how long it will take for the winner of the presidential election to be declared. Fears about a contested election and battles over ballots that could end up in courts, as well as a president who has not said he will accept the results, could unnerve investors. That may be especially true with stocks near all-time highs in spite of so many existing headwinds, including a pandemic and massive job losses and uncertain progress on vaccines and more federal stimulus. And the top tech stocks in the S&P 500 representing as much as 20% to 25% of the index in this bull market.

There's not much recent precedent to understand what a prolonged fight over the U.S. presidency could mean for stocks, but there is at least the Bush vs. Gore election battle of 2000. One thing is for sure: based on 2000, Q4 of a contested U.S. election year could see a meaningful uptick in volatility.

In 2000, it took five weeks to know the outcome of the presidential race. Over that timeframe, there were recounts and court rulings that added to market volatility for the S&P 500, which fell by 7.8% from Election Day 2000 through year-end. 

But it's a mistake to view the tech selloff as an election event, according to an analysis by DataTrek Research. Concerns about tech sector profitability, interest rate hikes to combat inflation, and a slowing U.S. economy were bigger factors at that time, as big names like Apple and Bank of America disappointed investors on earnings in Q4 2000.

The bursting of the dot com bubble was the biggest headwind for the S&P 500 in Q4 2000. In 2020, it may be better to watch another segment of the market closely in a contested election period: the Russell 2000.

In the only recent precedent for a contested election, U.S. small-cap stocks bounced back from market volatility quicker than large-cap stocks in the S&P 500.
DataTrek Research

Small-cap stocks are more levered to the U.S. economy. They also have less tech exposure than large caps, which mattered a lot around the dotcom bubble. For DataTrek, that also means it is easier to use small-caps to isolate the factors in late 2000 to see the impact that a contested presidential race had on U.S. equities.

The Russell outperformed the S&P from Election Day 2000 through year-end, declining by 4.4% versus an S&P 500 drop of 7.8%. And from the court's decision on December 12 through year-end, the Russell was up 1.2%and the S&P was down 3.7%.

A pro-business incoming president likely helped small-caps given their outsized exposure to U.S. economic growth versus large-caps. The S&P 500's gains were also more muted heading into year-end than the Russell amid its greater tech weighting and the overhang of weak fundamentals for that sector.

Still, if the outcome of this year's presidential race is contested, small-caps are an asset class to consider buying during any resultant election-related volatility. The latter should snap back stronger once the winner becomes apparent, according to DataTrek, especially if Congress passes more fiscal stimulus to help spur U.S. consumer spending.

Defensive market bets in 2000

From Election Day to the Supreme Court's decision in 2000, defensive sectors and asset classes, such as consumer staples and gold, outperformed as well. Sectors set to benefit from Republican policies – i.e. energy – also rallied through year-end.

Republican presidential nominee George W. Bush (L) and Democratic presidential nominee Al Gore talk during their third debate at Washington University in St. Louis, MO, 17 October, 2000.
Tannen Maury | AFP | Getty Images

A contested election does create uncertainty, which can favor more defensive sectors or asset classes until there is a known outcome, but the economic and market backdrop at the time also plays a very large role, DataTrek noted. A Trump versus Biden contested election result could favor more defensive plays until a winner is known, but likely as a compounding effect on the current Covid-related macroeconomic backdrop. In the current market, it's been renewable energy stocks, not oil and gas stocks, which have boomed since the March bottom.

In the end, the question isn't which stocks — whether tech stocks, or any stocks — might tank amid election squabbling. It's what stocks to buy after market volatility takes its toll to gain the quickest rebound in the U.S. market.

Think small, according to DataTrek.

"Small caps should outperform from a contested 2020 outcome like they did in 2000, especially if Congress passes more fiscal stimulus to help spur U.S. consumer spending given their outsized exposure to the US economy," said Jessica Rabe, DataTrek co-founder.