Does the S&P 500 mind the idea of a Trump presidency?

People, I do think there is a uniquely bad figure on the American national scene right now, and I am hoping for that figure to leave the stage very soon.  Nonetheless intellectual honesty and the pursuit of truth require me to communicate the following result to you.  This is from Sweet, Ozimek, and Asher:

More formal econometric analysis confirms the absence of a relationship between the S&P 500 and Trump’s electoral odds.  Regression analysis shows that day-to-day changes in Trump’s odds of winning had a statistically insignificant effect on log differences in the S&P 500.

See pp.21-22.  No, this doesn’t change my mind about the campaign and election, but how many commentators are willing to report this at all?  Try to come to terms with this?  The purpose of writing a blog is to force oneself to deal with the uncomfortable, not to push pat answers on the readers.  I know many of you feel it is your moral duty to stack arguments for or against one of the candidates as high as possible, but I have never myself viewed that as my mission here, no matter what I might be rooting for.

And please note that “stock markets failed to predict [fill in the particular historical event here]” is not a very strong response.  I again repeat the question: how many of you are short the market and long on volatility?

That’s what I thought.


Tyler are you drunk

You stole my first spot. I will make it up with a brilliant substantive post.

On the "uniquely bad figure" thing, USA Today and Steve Case feel the need to break longstanding positions of "no endorsements."

On the “stock markets failed to predict" thing, I'm comfortable with it because I think people don't have terribly integrated thought. It is quite possible that supporters of Clinton or Trump go to work on Wall Street and follow day to day rules, with that part of their brain, that part of their persona, and then get off work and think something else entirely.

Business culture probably plays into this. There is no room for an analyst who would tell the conference call "let's all short Trump."

You are out of your mind. We're talking about money here. Amoral money. Sacred cows get slaughtered.

It is certainly economic theory that the managed mutual funds would be looking at presidential polls and applying them to portfolio allocation, but as I say I doubt it.

But heck, the is MR, there should be someone from the funds here. Am I right, is this foreign to your culture, or do you do it?

I am adjacent to financial markets. I would definitely defer to those on Wall Street, but I have been a close observer of stock and bond markets for 3 decades.

A better answer is that Nate Silver's wild swings in odds exaggerate the reality of the situation. Taleb has scribbled some fancy math about this.

My view of what's acceptable at daily meetings comes from Taleb as well. I guess it wouldn't surprise me if someone has an experimental algorithm going from 538 to options pricing, but I really doubt that there is much money in it.

Silver addressed Taleb's math pretty effectively on his podcast.

The "wild swings" in odds reflect wild swings in the polls. If you believe the electorate is dynamic and opinions change, what is being exaggerated? The best idea I could come up with for explaining this is a strong prior that all of the undecided/3rd party voters will decisively fall Clinton's way, but I think that's a questionable assumption. Looking back beyond the past 3 elections, there are examples of sizable 3rd party votes in presidential elections. You also have candidates with record low approval ratings. What impact does that have on turnout? We don't have clear precedence, so we're left working with assumptions and analogies.

I guess what I'm saying is, the analysis that says Clinton has been a clear favorite since June would also have said that Trump had no chance of winning the Republican primary.

@mavery: the difference is Trump was leading in most polls through the primaries, and Clinton has been leading in them through the general. Trump was such a surprise (even to him) that most of us saw the polls and said 'just a matter of time, he will fade, this clown can't win' but the polls were right. And they will probably be right again for Clinton.

Nate Silver has done many mea culpas about this, he knows he screwed up the primary.

Early on before the primaries it was reasonable to assume Trump was a flavor of the week like Michelle Bachmann or Herman Cain.

>Business culture probably plays into this. There is no room for an analyst who would tell the conference call “let’s all short Trump.”

Wow anon, you've really cut through the fog and identified a systematic pricing failure that no one else has ever tried to identify or address. You should start a hedge fund!

That's cute, but really I only reiterate Shiller.

Anyone have a figure on what buy-side pressure on the S&P is automatic at this point, with everything from retirement plans to hedge funds keeping a market allocation they prefer to "trading?"

Maybe the markets know something you don't. I find all this Trump hysteria among the elite particularly those of the academic persuasion to be less a product of rational thought and more a result of the cultural bubble they are ensconced in.

You are exactly right. But there's no getting through to people in this bubble. It is however fun to watch them squirm.

Gee, which unqualified narcissist do you want to vote for, to replace the unqualified narcissist we've had for 8 years now (and lowered the bar in the first place)? It matters very little, and the market knows that.

With Trump, maybe you might get slightly better border control, but not a lot. With Hillary, you get someone who self-identifies as a woman, because 25 years ago her uterus worked. Neither affects the S+P (or my day). However one result absolutely kills those who spend their days feeling superior.

Enjoy the show!

I will remind readers of the sophisticated analysis of one of TC's favorite columnists (from the New Yorker):

"In the spring of 2005, New York Times columnist David Brooks arrived at then-Senator Barack Obama’s office for a chat. Brooks, a conservative writer who joined the Times in 2003 from The Weekly Standard, had never met Obama before. But, as they chewed over the finer points of Edmund Burke, it didn’t take long for the two men to click. “I don’t want to sound like I’m bragging,” Brooks recently told me, “but usually when I talk to senators, while they may know a policy area better than me, they generally don’t know political philosophy better than me. I got the sense he knew both better than me.”

That first encounter is still vivid in Brooks’s mind. “I remember distinctly an image of--we were sitting on his couches, and I was looking at his pant leg and his perfectly creased pant,” Brooks says, “and I’m thinking, a) he’s going to be president and b) he’ll be a very good president.” In the fall of 2006, two days after Obama’s The Audacity of Hope hit bookstores, Brooks published a glowing Times column. The headline was “Run, Barack, Run.”

Obama has been a lazy, incompetent failure. So much for the pants crease. Trump, he eats a taco bowl on Cinqo de Mayo and proclaims "I love Hispanics!". The aversion to Trump is really a class/crass thing. Trump is Rodney Dangerfield and the bien pensants are horrified, horrified!

Trump is Rodney Dangerfield. I never thought of it like that but you are right.

Watch this clip and imagine Rodney Dangerfield as Trump, and the press as country club members and that will explain the tone in the media.

Thanks. I can never get too much Trump.

Here's Trump cramming for the second debate:

I'll have to watch that movie again. And Easy Money, too.

It seems that Trump as Rodney Dangerfield goes back at least to 2015. There is a great scene in Back to School with RD in economics class. TC may wish to review it.

I would absolutely vote for the RD character in Back to School for President.

@Bob: I would vote for RD's character in any of his movies over Trump. Because there are indeed similarities, but RD's character (it's really all versions of the same guy) is not as mean or negative.

Both RD and Trump tap into the attitude of anti-elitism that you find in America, especially in the middle and lower classes. In the back of our minds we know Trump is a rich guy, but he acts like a first generation, "new money" rich guy and some people identify with that.

I can see why our current establishment feels threatened though. It seems that even on the right, if you don't like Trump, it starts because he seems like the crude, "new money" guy making cracks about your hat and your spouse.

I kinda think he will win just like Rodney Dangerfield always did.

Good paper, but the sample size is small. Trump is unprecedented. The closest analogy might be Andrew Jackson's second try for president, or, maybe, Nixon vs Humphrey. Nixon turned out badly (wage and price controls, devalued dollar which initially hurt imports, though not for long due to dollars popularity outside the USA, and I think he even restricted rice exports to Japan).

Key passage: "Under Hillary Clinton 12 the most likely scenario is that real GDP would grow 2.2% per year over the next decade, compared with 1.7% under Donald Trump. 13 " - this is key. The 'tail risk' is what is not being measured, as the paper points out. Analogy: who saw the collapse of 2008 in 2007 when the stock market was still strong? That's the 'tail risk' people are not seeing.

PS--about 2%/yr is the long term average real GDP growth in the US economy since 1990 I've calculated. Business as usual with Clinton, but crazy stuff to impact growth with Trump. Yet the stock market is complacent, foolishly, due to tail risk blindness.


Were it true that a Trump presidency would reduce growth by 0.5 points over a ten year period vs. a Clinton presidency, then there would be a good reason to avoid Trump. Heck, there could hardly be a stronger reason. The underlying analysis, however, is sketchy. The paper is here ( ). You will note that it assumes very large trade tariffs (which trump has not said he would impose) crippling trade. He also notes that trump's tax plan will increase the national debt by 10t with (a) mentioning any corresponding cuts or (b) noting that our pal barrack increased it by over 7 (yet mark has never had the same predictions for GDP growth given barack's spending). Overall not compelling.

I do think that Hillary's massive increase in capital gains tax, along with her pal barack's, will be negative to the economy and that is my entire reason for voting against her.

Nothing Clinton says she will do will actually happen, because gridlock. And most of what Trump says won't happen either, because reality. So vote for the one who's not a clown.

a) no doubt that is what I am hoping for, but who knows what will happen in the house, so why not vote for the person who isn't trying to explode the tax code?

b) barack and his media allies were about to get the house to concede to massive tax increases (a 46% increase!)

c) executive power can't move the tax code, but it can break industries when misapplied

d) a full stacked Supreme Court will likely be far more onerous on business.

So, no. Vote for Trump and try to hold back those that want to destroy economic liberty.

Nope, I like gridlock, and that's not even factoring in Trump's unique clowny awfulness. Dem president Rep Congress works best (1994-2000, 2010-present)

I'm a big fan of the gridlock argument. I'd personally bet the gridlock is more likely with Trump than Hillary - I expect Hillary knows enough dirt and which paws to grease to get stuff done.

Also, they were both born in the Pleistocene era and liable to croak any day now, so why aren't we talking about Veeps more? My ignorance about Kaine vs. Pence is staggering. I'm just assuming both are textbook party members.

(and gridlock would be more likely with Kaine than Pence)

The veep thing matters a lot with Trump, he has said many times he has no interest in the day to day work and will let Pence run things, along with Paul Ryan likely deciding on the legislation to send him to sign.

Clinton isn't going to die in her 4 years there, and she will be a one-termer.

The Mexican Peso has a much higher correlation, I think.

Part of the problem with using the S&P 500 as a gauge is answering this question: "why should the S&P 500 care who's president?"

Also bounded rationality and tail risk blindness, which the paper discusses, see my post above yours Brian.

Further, the paper does not address this issue: can a stock market crash influence people? When the market crashed in Sept 2008, I think it helped Obama, as people realized the Republicans economy policy was not a cureall. Thus, if the market crashes in October--and I'm calling it with a mouth bet--then it will favor Trump.

Re: your post and also Tyler's question "how many of you are short the market?"

If I'm a hedge fund manager being pitched a trade (short the market) and my analyst brought me this paper suggesting that the most likely scenario is a Clinton economy would grow 2.2% and a Trump economy 1.7% my overwhelming reaction is skepticism.

My first question is "on what basis do we arrive at this forecast and how confident are we in precision down to a tenth of a percent?"

Then we dig into the assumptions of the forecast and probably find it is nothing more than a wild-ass guess.

So I immediately discount the 50bp differential in projected economic growth massively. Then I discount further by betting market odds that give Trump a 70% chance of loss. Then I discount further by the asymmetric risk of shorting a market with unlimited upside . . . .

And ultimately we decide that it is a lousy trade and move on to greener pastures.

@Brian - buy futures, limit your downside to getting a short wrong? Also as another poster says on this thread, the BrExit LEAVE vote also had a 30% success rate pre-elections, yet won. You watch, crazy will win (much to my disgust).

As Nate Silver keeps trying to remind people, things with only a 30% chance of happening....happen all the time. Around 1 out of 3 times. So the polls/markets aren't wrong if they give a 70/30 edge to Clinton and Trump wins.

It's also not clear to me that a market crash / economic crisis benefits Trump

Part of the reason the '08 crash helped Obama is because McCain seemed so clearly out of his depth on economic issues. Perhaps Trump can bluster and BS his way through a crisis in a way that seems reasonable to a plurality of voters. But it's at least equally likely that his response to any crisis would just further underscore his flaws.

Yep. Obama probably loses without the September 2008 crash, because honestly who projected confidence and coolness under pressure, Obama or McCain/Palin?

but that is what is interesting, as Tyler says. given the apocalyptic commentary, you'd think the market would be concerned about a Trump presidency. Either the market doesn't think it will happen, or the market doesn't think it matters. The paper suggests evidence for the latter.

I can imagine a ton of possibilities under a Trump presidency that warrant apocalyptic commentary without necessarily being bad for the S&P 500 . . . 1) using the power of the presidency to punish the press 2) using the justice department to harass minorities 3) starting armed conflicts to avenge perceived slights 4) using the power of the presidency to punish political rivals and detractors

Sure, at some point the S&P 500 will start to price in the cumulative effects of this corrosion of democratic institutions. But to what extent and for how long do investors ignore that long-term damage a focus on the near-term and more likely impact of massive tax cuts and roll-back of environmental and other regulations?

I'm still struggling to see the value of the trade Tyler thinks should be so obvious.

So you're saying Trump will be no worse than Obama...

Don't be absurd. Obama never used the power of the presidency to punish the press. He used the power of the presidency (IRS) to punish *conservatives*

"1) using the power of the presidency to punish the press"

No danger of Clinton doing that. The press will meekly support her so no need to punish.

When has Trump say he would use the power of the presidency to punish the press? Restoring libel law to pre-Sullivan days is hardly a punishment and he can't do that in any event.

#2 and #4 are what's been done by the current administration. You don't care about our welfare, we don't care about yours. So, get ready for your audit, and the draconian fines on your little business.

I think this paper is more interesting than people will give credit for. The implication is that the net present value of the economy isn't impacted by who wins the presidency. In a typical election, I would say the more sophisticated readers would agree. In *this* election? Rather surprising.

Then again, same thing happened with Brexit. Stock markets discounted the probability of Brexit occurring more so than the direct betting markets. Shouldn't happen in liquid markets, but there we go. The day after Brexit, Eliezer Yudkowsky mentioned a strategy of a long-Clinton, short-S&P arbitrage strategy going into election night. Could be interesting.

I would argue that the posited relationship is the norm. I actually ran this same analysis in four years ago and found a very strong relationship between for changes in Obama-to-win values from prediction markets and subsequent changes in the S&P.

I do agree that's it's surprising in this election however. Perhaps Wall Street thinks the odds are much more lopsided and less variable than the prediction markets do?

"Perhaps Wall Street thinks the odds are much more lopsided and less variable than the prediction markets do?"

Maybe. Though that would imply an opportunity for significant arbitrage. Given that the election prediction markets have decent volume, you would expect this to disappear. The question of why it doesn't is the mystery.

Also - what was your finding? Obama win correlated with S&P increase?

If so, it would also raise the question of which is the causal.

Could be Obama more chance of winning = expectations of better economic performance in the future.

BUT, given that he was running against a very competent and business friendly Romney, I would posit the causal relationship was the exact other way. Market goes down = more economic anxiety = incumbent gets voted out.

Thinking about it, would actually be easy to determine. Did the relationship strengthen or weaken closer to election date? The former would indicate the causal is Obama = better for econ, latter would indicate econ anxiety = bad for incumbent.

Even if a candidate's policies are bad for the economy, they could have a positive effect on stock prices if their impact is to cause a larger fraction of the wealth to flow to the holders of capital as opposed to others, such as the suppliers of labor.

Good point, but remember the open borders crowd (ie, Bryan Caplan and Alex T) believe there are trillion dollar bills laying around, waiting to be picked up via higher levels of immigration.

The "uniquely bad figure" in the political scene today has to be Hillary. She and Bill are the most corrupt political figures in American history. The list is endless but is capped by the Clinton Foundation which is a tax avoidance, influence peddling, money laundering operation. Pay for play is the Democrat and Clinton way, yet nary a peep from the lying media.

Unfortunately, not unique.

I won't bother with a Clinton Foundation defense, because the facts are out there, it is not tax avoidance, it does save lives. Google a little.

What's interesting is not even the news is piling up about just how big an illegal tax avoidance scheme the Trump Foundation is. Google a little.

What's amazing is that Trump's knowledge of his own scam is the source of his skepticism about the other, real, productive charity.

And of course it is sad that people like wesmouch don't get that story arc, don't do the googles.

There you go again. Clinton used her political office to secure money for her foundation, which spends the bulk of its money on ensuring a lavish lifestyle for the Clintons and their minions.

“It seems like the Clinton Foundation operates as a slush fund for the Clintons" - Bill Allison, a senior fellow at the Sunlight Foundation.

Another guy who can't read tax forms. There are $325,000,000 in contributions, and Allison complains about "$30 million on payroll and employee benefits; $8.7 million in rent and office expenses; $9.2 million on “conferences, conventions and meetings”; $8 million on fundraising; and nearly $8.5 million on travel"

And none of that, as you claim, goes to the lavish lifestyle for the Clintons.

WTF do you even get "lavish lifestyle" out of that?

"it does save lives"

Always asserted. Never proven.

It is primarily a way to get others to underwrite first class travel and pay the salaries of political retainers.

Is The Hill neutral enough for you?

We know you can't hand fact check, but for the normals:

The Hill column is from a former Clinton employee citing Clinton Foundation stats. So, no, not "neutral"

No need to re-litigate Politiopinion.

Heh, if you believe that, you must also believe that "Huffman spent five years in Africa and Asia working for the Clinton Health Access Initiative (CHAI), where he served as the country director for Ethiopia."

Truly it is an elaborate scam when they go to Africa and Asia to do good works.

Who denies CF has employees, sometimes overseas?

No Clinton spent 4 years in Ethiopia. 4 hours to pick up a check maybe so long as it was on a private jet.

The Clintons take zero pay from the Foundation.

@wesmuch Did the Kool-Aid taste good?

"The purpose of writing a blog is to force oneself to deal with the uncomfortable, not to push pat answers on the readers." Who is "oneself"? The dictionary defines it as a person's own self. Which person is that? I believe Cowen is referring to the readers, not himself. Here's his next sentence: "I know many of you feel it is your moral duty to stack arguments for or against one of the candidates as high as possible, but I have never myself viewed that as my mission here, no matter what I might be rooting for." So Cowen's purpose of writing a blog is to force his readers to deal with the uncomfortable. As has become clear these past eight years (if it wasn't clear before), there is no collection of sacred texts, or canon, in economics, economists freely picking and choosing their preferred texts by which to judge; in economics, up can be down, more can be less, high can be low. Maybe what economics needs is a Constantine to call an ecumenical council to attain consensus among economists and to adopt a canon for economics. Surely the task for such a council would be easier than settling the Christological issue of the nature of Jesus.

What are the incentives of investors and traders driving the SP500? Investors look at fundamentals, in theory they don't care about who gets elected. Traders play with expectations, momentum, etc........but what is the thinking horizon of a trader? Intraday and a few days.

Just a few days ago Tyler said there are no Brexit consequences because Brexit has not happened. When it happens, we'll see the consequences. The same applies to Trump becoming president. We won't see any consequences until the guy gets elected. And then, there's still 10 weeks between election and inauguration day. If traders are going to gamble it's going to be on Monday November 7th, not before.

It's the future you chose.

Under Queen Hill, we get a permanently stacked Supreme Court that discovers "assault weapons" and "hate speech" don't enjoy Constitutional protection, and a dry-foot/dry-foot immigration policy to welcome in the US's new, permanent Democrat electoral majority.

Democrats are bad for my tribe. I'm voting with my tribe, like the Democrats do.

Are Democrats bad for your tribe because you like assault weapons and hate speech?

They're bad for my tribe because they can out-thug me and take my stuff, and in the Brave New World I'm not allowed to defend myself or argue against them.

OK, for a minute there I thought you were a paranoid. Clearly you are not.

What uncomfortable thing am I supposed to deal with here? My portfolio structure? Premature publication? Human folly?

We've seen responses by individual industries (e.g. Clinton & coal) where there are clear consequences, but here no one even knows what a Trump presidency even means. I could see most players effectively just punting because they can't even model it.

Has it been established through historical analysis of previous elections that we should expect a relationship here?

This is a case where evidence of a relationship is meaningful, but absence of one isn't very (barring an analysis of previous elections showing we should be seeing something).

"Has it been established through historical analysis of previous elections that we should expect a relationship here?"

No relationship. But if there were one, it likely isn't the one people have been led to believe.

Here's the nominal price appreciation from election to election for the S&P 500 . . .

Obama 147%
Bush (36%)
Clinton 225%
Bush 56%
Reagan 99%
Carter 34%

If anything, healthcare and in particular biotech stocks have been reacting very negatively to any indication of a clinton bump.

The issue in this election of course isn't the presidential side; it is driving up turn up enough on the congressional/senate side, and the local elections.

I can foresee a scenario where HRC wins, dems take the senate, and the house majority is severely trimmed. I don't think that is the answer for gridlock but it does make things much easier.

I think the market's resilience is because a belief that the economic damage a "uniquely bad figure" can commit as president is limited. Congress, dysfunctional as they are, will be a check. He is plenty scary, just not to your index fund. There also might still be a collective denial about Trump's (I'll assume that is whom we are talking about) chances; I know I have trouble accepting it.

Poorly thought out arguments, imo. Why would the S&P drop with an incompetent president who wants to increrase govt. spending? Look at how brexit hasn't hurt the London Stock market, but has hurt the pound

If trump wins, the loser will be the dollar, not the S&P. Some 60% of all foreign trade is dollar denominated, due to its stability. Trump is the debt king, he'll cut taxes for the rich and spend money on expensive walls and infastructure projects. This is good for the s&p and bad for the currency.

I'd also like to add, I am invested heavily in real estate, then stocks, then bitcoin. I also hold a very small long position in volitility, and hope to sell in the next 2 months as wall st wakes up to the possibility of trump, because as of yet they haven't, other than a few like Gundlach.

Except global instability causes flight to the dollar, so an unstable US president causing global instability has the perverse effect of making the dollar stronger.

@Tyler Cowan I gather from your circumlocution that you're talking about Trump. The Clintons have been on the national political scene for a quarter of a century. If, at this point, you can't see that literally anyone is preferable to H. Clinton then you must be one of those hapless academics I've heard about.

easy paid troll detection test: no one uses the term "circumlocution".

You're dead wrong.

And troll is the most overused word on the internet.


People should use it more often. 'Circumlocution' is an awesome word.

He's not hapless. He's a well-compensated academic who knows which side his bread is buttered.

This is not to say Tyler is venal or mercenary. But academe is extremely hostile to certain ideas.

Like anti-intellectualism.

Academe is hostile to anti-intellectuals but engages in plenty of uncritical thinking.

Aye. Google "Jason Stanley".

As of now there is not one pro-Trump argument above, why he'd be good for the economy, or the S&P 500. "Fans" should reconsider on that alone. They themselves are not putting forward the positive, just (again and really) false equivalence that "all politicians are X" or claims about Clintons that go nowhere but down conspiracy theory rabbit holes.

"Pepe" was just a troll, but yes that is part of it too.

Hey guys, if you just wanted to beat Clinton, why didn't you pick the Republican candidate with the best 1:1 chance against her?

Because I don't want a kinder, gentler version of Hillary Clinton.

It's curious that the two parties don't actually groom potential candidates over a long period of time for an office like POTUS. The Republicans could identify somebody who has what it takes, maybe a junior military officer, and mentor them through a career that would culminate in the presidency. In the case of the Democrats, I would have bet real money that Rodney Slater would have been the first black president but the Clinton coattails evidently weren't strong enough to make that happen. Leaving the nominee to what seems to be chance doesn't appear to be an effective way to win elections or govern a country.

"Leaving the nominee to what seems to be chance"

The Democrats agree with you. They chased away every other reasonable possibility so Clinton had a free shot. The DNC then rigged the system to make sure Sanders would lose.

Another conspiracy theory. Where are you on the Kennedy assassination and the vaccines? With your candidate?

Democrats tried to shut down Sanders because they thought he couldn't win the national. That's brutal politics, but it's in the other direction entirely.

But ultimately it was the primary voters (not me, still registered Republican) who chose Clinton. (I held my nose and voted Cruz. Perhaps I should have protest voted Kasich after all.)

"Another conspiracy theory" Hacked emails proved it. DNC head resigned over it, but it's just a conspiracy, right?

"Democrats tried to shut down Sanders because they thought he couldn’t win the national."
"The DNC then rigged the system to make sure Sanders would lose."

are just restatements of the same thing.

Conspiracy theory!

You misread me, but subtle distinctions are hard?

Yes, emails show disdain for Sanders. Yes, they show support withheld. No they do not show a rigged system or vote.

See what I'm saying? A party refusing to back a candidate may offend his backers, but it is pretty normal.

The "4 most damaging emails" are in retrospect, nothingburgers

But I thought what made Clinton uniquely evil and a harbinger of America's doom is her unequalled measure of corruption and venality and failure. How is that anything like Kasich?

Kasich is an a** but has a track record of political success.

As a general rule, the stock market is generally agnostic where politics are concerned. That's because most political events do little other than contribute to the garden-variety background noise that always exists in the markets, which is why investors can safely disregard news stories like this one, where whatever effect was claimed the political event had on the stock market had completely disappeared by the next day.

There are exceptions, where some political events can directly influence investor behavior and have a pronounced effect upon the stock market, where a now classic example is the Great Dividend Raid of 2012 and the subsequent Fiscal Cliff Rally of 2013. What makes these examples different is that they involve a direct impact upon the specific rates of return that investors can reasonably expect to apply in the near term future, say through changes in investment tax rates.

Unless it directly affects the rate of return math for investors, don't expect the stock market to show much concern over any political event.

Betting markets for this election are way off. Trump's real chances never been above 10%. People bet with their heart when it comes to politics. At one point in the Democratic primary Hillary and Bernie were almost at parody. I'm not long volatility but I am about to make a few grand on Hillary winning :-).

Sometimes, spelling errors work better than the intended spelling.

Shorting the market and trading in options on the VIX is too exciting for me, but I did move from a conventional 60% stocks, 40% bonds allocation in my retirement portfolio to 25% stocks, 75% cash (actually very short term Treasury bonds). In my view, that bought me some amount of insurance against what a President Trump might do. My priors are that I think there is a 1/3 chance that Trump wins, and if the does I think there is a 1/2 chance that he really withdraws from all our trade pacts and reinstates some version of Smoot-Hawley (which is within the President's executive authority). That would of course cause a market crash. So in my view there's a 1/6 chance of crippling losses, that is a bit too high for me to just let it ride since I'm only a few years away from retirement. If Hillary is elected (as I expect and hope), I'll rebalance again before the end of the year and cheerfully accept the sacrifice of the gains I've passed up for the last six months as an insurance premium.

Markets do care about the presidency, at least if we look at the latest debate performance. Given the response of the strengthening peso during the performance (half a handle), we can infer that Hillary was the stronger debater in the eyes of market participants. Furthermore, from the increase in S&P 500 E-mini futures (15 points!), we can infer that markets believe that a Hillary presidency will be beneficial to US stocks. This could be through multiple channels, and this is more difficult to identity. The propect of a Hillary presidency could affect risk premiums, firm profitability expectations, or firm growth expectations--which one is still unclear to me.

S&P Chart during the debates:

USDMXN Chart during the debates:

15 points (0.7%) isn't Earth-shattering, but it's something. As of yesterday's close, the S&P 500 is up 5 points (0.2%) from last Friday's close.

Either she didn't get much of a bounce, or it's not that big a deal to the market.

Or other things like Deutsche Bank are more important to the market in late September. The market will fall if Trump looks like he's going to win, but it won't fall much more than 5-6% IMO.

People don't really think he will win, despite the polls, and consequently, aren't making financial bets based on the possibility of his winning. Also, he represents a level of volatility that may not be easy to hedge.

Presidents care more about stock markets than stock markets care about Presidents. There's a view, now largely buried in gobbledygook, that after Reagan's initial tax cuts the economy and stock markets remained generally weak ("loss of confidence") until the increases in the 1982 tax act and later signaled the administration was serious about deficits. People now are always talking about his initial tax cuts but later he raised taxes some eleven times eventually undoing about half of the initial cuts (Wikipedia on Reaganomics). (This seems to be part of a general tendency for crowds to perceive individual actors as more influential than evidence allows. So for example the idea that the Fed Reserve sets interest rates rather than is generally following the markets playing catch-up and trying to avoid too large of a gap, though sometimes it does tries to nudge the market rates a bit. Milton Friedman understood that.)

I'm short the market, but for reasons entirely unrelated to who may be the next president.

Stock market? Since when has the stock market values represented anything resembling reality?

Stock valuations are dwarfed by the mass of fixed income intruments. The bond market is much larger. What have bonds done?

Stock valuations are more representative of the Federal Reserve's policies of managing the financial system than valuations of the corporations.

The amount of chinese money fleeing the country and seeking refuge dwarfs any amounts that would be invested or shorted by those who think that Clinton or Trump would have an effect.

"uniquely bad figure on the American national scene"

Clinton is not unique. She is just Nixon II.

Nixon was anti-establishment. That's why he had an enemies list.

The enemies list was for the most part a register of people who were not to be invited to White House functions. I wouldn't want Daniel Schorr at my dinner table either. Even John Dean (not the most credible source) admitted that the core list had only twenty names on it and the people on it were targeted for tax audits and the like (which were not carried out). Well, the IRS has spent three years successfully stonewalling about their harrassment of the political opposition and the expressed concern of anyone whose ox was not gored is zero.

As several have mentioned, the best recent parallel is Brexit.

Key Brexit data:
a) 30% prediction market for Brexit (as mentioned above)
b) vote was June 23, but FTSE didn't drop until June 8 (2 weeks before vote)
c) but FTSE then recovered again by June 22 just prior to vote(!)
d) then dropped sharply on June 23 Brexit vote when result came in
e) but....has since recovered (Brexit actually completely happening now more in doubt)

Plausible conclusions might be:
1) prediction markets best we have, but FTSE didn't do a great job of tracking to Brexit prediction market. Why? well...
2) in face of very great uncertainty on largest questions, markets hedge/don't react since simply can't know consequences. There is no human mind capable of foreseeing the consequences of Trump as president. Simply far too contingent: crazy high causal density, and small random impact can butterfly things off in new directions. So only react once it does happen. Does Trump as incompetent buffoon make stocks go up or down?
3) theory this means betting on volatility would be good. But maybe just can't model so people don't make that bet since the elite market makers have a culture of gambling when they know things other don't. In this case they would be betting they are dumb too. So don't do it, even if logically smart.
4) disaster of Brexit was overdone by newsmedia, since political backlash of the vote can be mitigated even when Brexit vote itself was bad. (that is, Trump as president might be contained by checks and balances).

Maybe the implication is betting on volatility is a solid bet, underrated by the market. But of course not confident enough to do that with my own money. My mind reels. :)

I'm amused by the assumption that Trump will be "an incompetent buffoon" while that old guy's wife will be what? Miraculously different than her 50 year track record of crime and error?

It seems that good arguments like yours are always undone by this one irrational assumption. Perhaps that's the central flaw in using financial markets as a predictor. They have this enormous blind spot for 50% of the data. The possible outcomes are 50% unknown (Trump) and 50% Full Blown Banana Republic. Those are the choices before the voters and how they are viewing them. Do they swallow the poison or do they roll the dice on what may be a cure?

There's a pretty good chance that Mrs. Bill Clinton's alleged physical problems are an example of PTSD, a result of being under fire in Bosnia in 1996. Let's give her some slack.

Are you sure? I would think you'd get the clearest market signals in response to significant, discrete events that overwhelmingly seem to tilt the race. It would be interesting, for example, to look at the futures chart around 3:00am eastern or so this morning, when the GOP candidate for POTUS exhorted Americans to "check out the sex tape".

Suppose I thought the world is going to end in a year?

If this is a popular belief, it would show up in market prices pretty clearly. For example, no point investing in anything with a long term payout.

Suppose I think there's a 10% chance the world would end...but it's very binary. Throw a ten sided die, if it lands on 1 the world ends, but anything else the world continues as normal. In other words, it is not like it ends on a '1' but '2' is just half the world ends, '3' a quarter and '5' and above the world is more or less normal.

There's not really much point adjusting my investments. I would probably make a working assumption the 90% of cases where the world goes as normal will play out and invest accordingly even though there's a chance the world could totally blow up.

Perhaps the market does indeed think:

1. Trump is so bad that it makes a President Clinton more likely, FivethirtyEight prediction changes are not a good tracker of whether or not Trump wins the actual election but just shows Trump along the way.

For example, when Clinton got sick it appeared Trump surged in the pools. FiveThirtyEight moved in Trump's favor. A market player, though, might have observed that while Trump surged he didn't surpass Hillary and the first debate was still coming up. A market player might then note that while Trump's surge alters an index of polls (Nate Silver) it actually provides information that indicates Trump is not likely to ultimately win....namely his surge under optimal conditions (sick Hillary being taken out of the game briefly while sort of confirming one of Trump's conspiracy theories) is insufficient and it sets up a 'come back narrative' for the upcoming debate.
2. A President Trump would most likely be contained and the world would go on as normal but there's a chance of a total catastrophic disaster but it is very binary.

The result might be that even if Trump does represent a potential danger of disaster that Clinton doesn't, it will not show up in price changes unless the market becomes very sure Trump will actually win. In that case the price change might be sudden and dramatic rather than a wave the gently ebbs and flows with the movement of polls.

People, I do think there is a uniquely bad figure on the American national scene right now, and I am hoping for that figure to leave the stage very soon.

A complaint reducible to an academic's horror that his cosmopolitanism is not shared by the general public and they might have the force to put the kibosh on their own displacement.

I think Trump is horrible, and this has almost nothing to do with cosmopolitanism.

It used to be that the elites were disdainful and cruel toward the masses, now they're tripping over each other to find the best way of helping the poorest among us, and patting each other on the back for it. They used to make us spit and swear, now they make us retch.

Statistical insignificance does not mean evidence of abscence. Seriously, this is like stats 101.

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