Can financial markets tell us what people are thinking about the election?
Of course. That was no more apparent than in how the market responded immediately after it was reported the FBI was reopening its investigation into Hillary Clinton. Market volatility (measured by the VIX index) spiked, reflecting the fact that the market largely expected a Hillary victory to be inevitable and had to adjust. Gold also quickly increased in value, which again reflects the increased uncertainty. Likewise, the value of the Mexican peso depreciated against the U.S. dollar.
The main reason the market is reacting so strongly to the possibility of a Donald Trump victory is because of uncertainty. Investors largely view Hillary as a continuation of the status quo, so there’s nothing for which the market needs to adjust. It has nothing to do with whose policies are objectively better for the nation and the economy in the long run.
With a week left until the election, what’s the market saying about Trump’s odds of victory? While the betting odds derived from over $85 million in bets still show a 70+ percent chance of a Hillary victory, the trillions of dollars in the equity market may be saying otherwise.
As CNBC reported: The stock market’s election year performance between July 31 and Oct. 31 has often accurately predicted the next president — and this year it’s pointing to a victory by Donald Trump, if history is a guide.
Sam Stovall, chief investment strategist at CFRA, says the market’s decline this fall has been a bad omen for the incumbent party and Hillary Clinton. The S&P 500 is down 2.2 percent since its close of 2,173 on July 29, a Friday and the last trading day of July.
“Going back to World War II, the S&P 500 performance between July 31 and Oct. 31 has accurately predicted a challenger victory 86 percent of the time when the stock market performance has been negative,” he said. The one time in eight that the incumbent party won with a negative stock market was in 1956, when Adlai Stevenson challenged President Dwight D. Eisenhower.
Stovall said in that year, Britain and France joined with Israel in a military action against Egypt over the Suez Canal. It was also the year of the Hungarian Revolution. “This time around if the Democrats retain the White House, I will come up with two responses. One is that history is a guide but never gospel, and two, the negative performance by the market could be a reflection of the worry of domination that a Democratic sweep would bring,” said Stovall.
The market had been concerned about the possibility that Democrats would take the House of Representatives, but on Monday, after new revelations about an FBI probe into emails of a Clinton staffer, those worries were pushed into the background.
Stovall said when the market has been higher in the same period, the incumbent party won 82 percent of the time since World War II. The exceptions have been 1968, when there was a third-party challenger, George Wallace, and in 1980, when the third-party candidate was John Anderson. Gary Johnson is the third-party Libertarian candidate this year.
Is this a sign of a Trump victory, or one giant coincidence? In only one week we’ll find out for sure.
[Note: This post was authored by Matt Palumbo. Follow him on Twitter @MattPalumbo12]