It’s The Market, Stupid
In the 1992 Presidential election, James Carville coined the phrase “It’s the economy, stupid”. The slogan was a reminder to candidate Bill Clinton the electorate votes with its wallet.
That is clearly still true, but as the Chart on the left suggests, the stock market may be the MOST important factor of all.
Betting site Predict It (https://www.predictit.org/) allows speculators and gamblers to “bet” on the outcome of an event, such as an election. The upper chart shows the market determined odds of Trump being the Republican nominee in 2020 over the last 90 days.
One cannot avoid noticing the correlation between Trump’s apparent political fortunes with the level of the stock market. This makes sense. Both the betting markets and stock markets are driven by money flows. The economy is tough for the average voter to understand, but stock prices are very direct and objective.
More than half of Americans have a 401-K, investment account or pension account. The value and performance of these accounts is a significant factor in determining how they’ll vote in 2020 and how they perceive others will vote.
Betting Markets Often Behave And Look Like Equity Markets
Leading the Democratic pack is Kamala Harris. Her political fortunes are not particularly tied to any market, but rise and fall with the news and rumor cycle as well as the strength of other candidates.
A graph of the odds of Kamala Harris being the 2020 President are shown in the graph on the left. The “technical” analysis is purely for fun and not intended to be any more than that.
The Presidential Cycle Theory
Another method at relating politics to the stock market is known as the Presidential Cycle theory. The theory holds that in Years 1 and 2 of a President’s first term, the priority is on fulfilling non-economic campaign promises and, as a result, stock markets may not perform well. After the mid-term elections, however, reelection becomes the focus with greater attention to growing the economy.
According to Yardeni Research, the market averages a gain of about 5% during each of the first two years of a new President’s term, 13% in the third year and 6% in the fourth year. (https://www.yardeni.com/pub/stmktprescycle.pdf).
Under this theory, the market’s returns are affected largely by the President’s presumed political motives. Yet, it isn’t clear just how much impact a President has on the markets at all. Arguably, the Federal Reserve has more actual impact. The perception, however, is that the stock market is a real-time poll on investor confidence in the President’s performance.
Polls Versus Betting Markets
Online gambling on politics are mostly illegal in the United States, thanks to the Unlawful Internet Gambling Enforcement Act of 2006 (https://en.wikipedia.org/wiki/Unlawful_Internet_Gambling_Enforcement_Act_of_2006). Predict It is based out of Victoria University in New Zealand.
Predict It is the largest and deepest of all the internet “market makers”, but it is hardly large or deep. Bettors are limited to accounts of about $1000 and transaction costs are very, very high (10%). Nonetheless, many of their individual markets have $1 million or more at risk and appear to very accurately and reasonably assess event odds.
The track record of the political “bookies” has been mostly excellent. For example, Barrack Obama NEVER fell below 50% odds of re-election even when many polls put Mitt Romney ahead in the final weeks of 2012. During the 2016 election, Donald Trump became an early leader in the betting markets to be the Republican nominee despite 17 rivals and widespread skepticism of his candidacy. While there is no official study to point to, betting markets seem to have been more accurate than polls in most electoral contests.
While the misses have been relatively few, some have been very noteworthy. For example, the Presidential election winner of 2016 was NO WHERE anticipated by bettors. Even late on election day, Hillary Clinton was still favored by 5 to 1. The Brexit referendum was also predicted to fail miserably by these speculators, yet went on to win.
Theoretically, markets ought to be more accurate predictors than polls. Polls require sampling which introduces statistical errors and biases. Markets do not. Unfortunately, polls may be the only information that bettors have to rely on. Therefore, the two will not substantially diverge.
What, if anything, can we forecast about 2020?
- The Presidential Cycle theory would suggest that this year ought to be VERY favorable for stocks. With the Federal Reserve now pro-market, the current rally may have substantially longer and higher to go. See “Federal Reserve To The Rescue?” (https://markonomics101.com/2019/01/31/federal-reserve-to-the-rescue/).
- The election itself is still distant, but the betting markets suggest that for Trump to be reelected, a healthy stock market is not optional. If the economy stumbles, enters recession and suffers a painful BEAR MARKET, Trump not only becomes a longshot for re-election, but also MUCH more vulnerable to challenges from within his own party.
The information contained in Charts is always enlightening and valuable. Information is Power. Information is Wealth. That’s where we come in.
Be Informed, Not Misled!