Contrary to popular belief, elections rarely matter for financial markets.
Looking at 40 years of data, covering equities, the dollar, and bonds, we have found that presidential elections generate a little noise, but rarely any signals. Popular ideas such as ‘Democratic presidents being worse for investment returns’ do not stand up to scrutiny.
Even sectoral ramifications are often hard to identify. What were the two worst performing sectors during the Obama years? Financials and energy.
The worst under President Trump? Financials and energy. There were and are bigger forces at work, driving the underperformance of those assets, than the vagaries of politicians indulging in rhetorical flourishes.
Political polarisation means that the Republicans are now right-wing populists and the Democrats are touting more big government, even socialist policies. It is possible – though not certain – that it is different this time.
Preparing for what comes next
In mid-September, the betting markets re-evaluated the huge lead they had given Democratic presidential nominee Joe Biden during the summer.
Nominally, Biden still had the edge, but, given the bookies’ track record, the odds suggested it was really too close to call.
We agreed with this. We do not pretend to be able to predict elections, but we do have the tools to help assess the spread of likely outcomes. “Prepare, don’t predict” is always a good mantra for investors regarding political matters.
Biden had a huge lead in the national polls, but not in key swing states, where in some cases he led by less than Hilary Clinton did this time four years ago.
Some political science models favoured Biden, but our own econometric model, suggested that Trump still had the edge if – and it is a big if – this election is a referendum on the state of the economy, which is what it usually comes down to.
But the betting markets have moved again. After the first debate and Trump’s Covid diagnosis, the odds present a greater probability of a Biden victory than ever: a 68 per cent chance.
The debate is a red herring: post-debate polling failed to predict Trump in 2016, Obama in 2012 and Bush in 2004.
We agree that Trump’s Covid diagnosis helps Biden, but not to the extent that the bookies suggest..
Analysis of myriad opinion surveys suggests that Biden’s chances are maximized if he keeps voter attention away from the economy and on the disease.
Trump’s economic track record is too strong (whether US economic strength had much to do with his policies or not is irrelevant).
Typically, more Americans approve of his handling of the economy than approve of him as their president.
But the US’s Covid second wave (and possibly now its third) impacted a disproportionate number of counties in swing states that Trump won last time.