The market assumes former President Donald J. Trump has an even chance of winning the November election.
For now, they don’t seem to care either way.
Political prediction markets, where traders can bet on the outcome of November’s election, indicate the presidential election will be close.
After trailing for months, President Biden narrowly edged out Mr. Trump in bets on Predictit, the longest-running commercial prediction market in the United States. On Betfair, a robust UK predictions market that is officially closed to US residents, Mr Biden is moving within 1 percentage point of Mr Trump. Polymarket, an offshore market that only accepts cryptocurrencies, shows Trump with a slight lead.
“Prediction markets right now are saying the presidential election is basically a toss-up,” said Dartmouth economist Eric Zitzewitz. “And the stock market hasn’t reacted negatively to that at all.”
odd year
This is puzzling in several ways.
Stock prices have been strong this year. And with low unemployment, high economic growth, and rising productivity, one would expect “the incumbent president to be the likely candidate,” said Jim, an independent economist and longtime market strategist.・Mr. Poulsen says. “I would argue that if you didn’t know anything about what was going on and someone told you about the latest economic statistics, we would be celebrating it as nirvana.”
But that hasn’t happened. “Something seems broken,” he said.
If we look only at the economy, the cause could be inflation. In June 2022, it will reach 9.1%, the highest since the 1980s. The consumer price index continued to rise at an annual rate of 3.5% in March. The high inflation was shocking even though there had been no inflation for 40 years. It may have a disproportionate effect on how people view the economy and the current government.
Back in the 1970s, Arthur Okun, an economist in the Johnson and Kennedy administrations, invented what became known as the “misery index.” It was simply the sum of the unemployment rate and the inflation rate.
The misery index is currently quite low, as the unemployment rate is near its lowest point since the 1960s. The inflation component may be distorting people’s attitudes in deeper ways than that or any other measure captures.
different types of candidates
Clearly, inflation is not the only potential anomaly in this election year. Whatever he is, Trump is an unusual candidate.
He faces numerous felony charges for a wide range of crimes, so much so that a cottage industry is devoted to tracking his crimes. Trump is scheduled to be arraigned in a Manhattan courtroom on Monday on charges of covering up a sex scandal during the 2016 presidential campaign, the first criminal trial of a former president in U.S. history.
He is a nontraditional candidate in other ways as well. Trump continues to deny that he lost the last election. He has exercised authoritarian power, reduced America’s role in NATO and other multilateral organizations, raised tariffs that curtailed free trade, cut environmental regulations and antitrust enforcement, and contributed significantly to his profits. He speaks positively about the drastic reduction of the professional bureaucracy that currently exists. run the government.
Long-term investing assumes that the future will resemble the past, at least to some degree. But in his second administration, Mr. Trump engineered a deep break with the past, abandoning the Washington-based global consensus that had prevailed since the end of World War II and enabled financial markets to function and prosper. I promise to do that.
Markets are said to hate uncertainty, and Mr. Trump has all but guaranteed that. In such a situation, major market disruptions are not that shocking.
But for now, the stock market is unfazed by his apparent political strength. That’s evident in a series of polls that show a close race, but Trump’s approval ratings are almost always low. lead.
Perhaps investors are heeding the old Johnny Mercer lyric, “emphasize the positive and eliminate the negative.”
With the exception of 2020, at the beginning of the COVID-19 pandemic, the market has performed admirably well during the Trump administration. From Trump’s inauguration in January 2017 to Biden’s inauguration in January 2021, the Dow Jones Industrial Average returned 12% annually, according to Bespoke Investment Group. The Dow average return during Biden’s presidency was about 7.7% on an annualized basis, which is the median return for all presidents since 1900.
Looking back, it’s clear that the stock market and the economy as a whole flourished under President Trump. That seems to be what many investors remember now.
Weigh the odds
Goldman Sachs has used Predictit probabilities to conduct traditional analysis of how elections affect the economy and markets.
Goldman started with the assumption that Trump was likely to win and would probably cut taxes. With many of the 2017 tax cuts set to expire at the end of next year, the next president will have to decide what to do with taxes. Trump’s anticipated tariff hikes could lead to a global trade war.
The analysis says it is unlikely, but very likely, that President Biden will be re-elected, and that it would probably be accompanied by increased spending on social services. Either way, a landslide victory is unlikely. Therefore, unless at least one chamber of Congress is controlled by the president-elect’s party, Congress would be expected to act as a brake on major changes by whoever occupies the White House next year.
If this kind of thinking is correct, it becomes less important to investors which candidate wins. However, it is possible for investors to insure against complete disaster.
One way is to use the options market. If you look at option pricing in response to S&P 500 volatility, you’ll see a spike in contracts expiring next November and December. Such options are expensive. This price may simply reflect a conservative assumption that the uncertainty of the election result will cause the stock market to move more than usual. Trump supporters who fear a Biden victory may also buy these options.
Nathan Sonnenberg, chief investment officer at wealth management firm Pitcairn, said in an interview that such options are not important to him. “The world only ends once,” he said, but you may be wasting your money on them.
History suggests that if the world isn’t ending, it’s better for investors to stay in the stock market. Some statistics from Bespoke Investment Group have been revealed.
If you had invested $1,000 in the S&P 500 since the Eisenhower administration in 1953 and held it only during Republican administrations, it would have been worth $27,400 by March 20th. If he had only invested during Democratic administrations, his stake would have been $61,800. But if he had just shut up and carried on until the end when he found a particular president disgusted, he would have pocketed $1.69 million.
Staying with the market through what could be one of the most controversial and problematic elections in history may be an impressive feat. Stock and bond markets are fairly calm, but it may take fortitude to be a long-term investor during a tough political season.
