But the ride was not a straight shot down. Instead, traders spent the last three weeks of November glued to their screens, watching every twist and turn of the recount. At one point, rumors circulated that Gore was going to throw in the towel; the markets quickly rallied. He emphatically dismissed them on television – and stocks dropped another 5%.
The entire period turned into an object lesson in risk and uncertainty as described by the economist Frank Knight in 1921. His key point can be boiled down to the contrast he drew between “measurable risk and unmeasurable uncertainty.” The first could be calculated and a wager made based on the odds; the second was a genuine shot in the dark.
The electoral uncertainty posed the latter problem. As Bush and Gore slugged it out over the course of November, traders quickly recognized that there was no real way to make a calculated bet on the outcome. Is it possible to count Supreme Court votes during an unprecedented crisis? What if an exhausted poll worker studying paper ballots miscounts the recount? The markets reacted predictably, if badly.
In fairness, some of the declines in the market reflected the fact that investors began spending more time and energy on corporate earnings and other conventional sources of data. But this scrutiny could also be interpreted as a shifting of anxiety about an uncertain election to the more familiar terrain of measurable risk.
When the Supreme Court issued its controversial decision in Bush v. Gore, the markets quickly rebounded. And not long afterward, they resumed a gradual decline, bottoming out a couple years later. But the downward drift was an understandable reaction to the growing tide of bad economic news that began accumulating in the new year. This was risk, not uncertainty.
The stakes are even higher in 2020. A sitting president with a penchant for divisive rhetoric, conspiracy theory and litigation. A challenger preparing for a protracted fight. A market that is rallying despite lockdowns and Covid-19, but capable of historic swings. A media environment driven by late-night presidential tweets and continuous coverage on cable news. It’s a recipe for maximal uncertainty, though investors can’t say they weren’t warned.
Stephen Mihm, an associate professor of history at the University of Georgia, is a contributor to Bloomberg Opinion.