Column: Is the stock market predicting a Clinton win — or just hoping for it?
The stock market has been unusually calm for months, which indicates businesses don’t expect much change.
The stock market took off like a rabbit on Monday, in a massive rally widely attributed to Hillary Clinton’s perceived chances of winning the presidential election. Those increased sharply, the smart money seemed to be saying, after FBI Director James Comey effectively cleared her of email wrongdoing over the weekend.
There’s little doubt that investors are hoping that Clinton will win. But in this era of public obsessions not merely with election polls, but with election forecasts, the stock market’s action raises another question: Is the stock market predicting that she’ll win?
The prediction markets are made up of...betting on political events. The stock market is partly based on the political climate, but also on many other things,
Economist Justin Wolfers
If so, voters would have another metric to judge the course of the Clinton/Trump race, to go along with betting markets such as Betfair and PredictWise, and the prognostications of Nate Silver, Drew Linzer, Sam Wang and their ilk. When you’re obsessing over an election, the more the merrier.
On the surface, there may be something to the stock market’s predictive value. At the very least, it has tended to move parallel to the perceived fortunes of Clinton and her Republican opponent, Donald Trump.
Economists Justin Wolfers of the University of Michigan and Eric Zitzewitz of Dartmouth documented this action for a paper last month. In their paper they tracked the change in the futures price of the Standard & Poor’s 500 stock index against the prediction markets during the candidates’ first debate, Sept. 26. The S&P 500 moved up sharply during the debate and the first few minutes of post-debate analysis, during which Clinton was widely judged to be mopping the floor with Trump.
A similar trendline followed the latest iteration of the supposed scandal of Hillary Clinton’s emails. The S&P drifted 2.7% lower in the six trading days from Oct. 25, the last before Comey issued a letter stating the FBI was taking a further look at her emails, through Friday, the last trading day before he issued a letter stating that the bureau hadn’t found anything new and still thinks her actions don’t warrant prosecution. Monday, after the second letter had been issued and digested by pundits, voters, and investors as a big plus for Clinton, the market made up almost all that loss, rising 2.22%.
Unfortunately for modern tea-leaf readers, even Wolfers doesn’t think the stock market has any political predictive capacity. “The short answer is no,” he told me. “The prediction markets are made up of people betting on political events. The stock market is partly based on the political climate, but also on many other things, like whether a company reported earnings that day.”
In other words, there’s too much noise embedded in a stock market move to isolate investors’ opinion about a political race. Prognosticators may have been a bit misled into seeing a link between the stock market and political environment, Wolfers and Zitzewitz suggested, because of the especially pronounced move in the S&P futures during the first debate. But that may have been a product of the pronounced impact on the race of the debate itself, the first head-to-head matchup of the two candidates. The “widely watched debate,” they wrote, “yielded a sharp and clearly exogenous shock to the probability of a Clinton versus Trump presidency.”
Moreover, it’s hard to tie election results too closely to the factors moving the broad financial markets, often in a macroeconomic feedback loop. “Election odds will be correlated with financial markets for a variety of reasons,” they wrote. “Electoral shocks affect the economy; the economy affects the election; and other factors affect both economic and electoral conditions. As such, the simple correlation between prediction market and asset prices confounds the effect of the election on the economy with the effect of the economy on the election and the effect of other factors on both.”
That said, there’s no question that at several points, the financial markets have correlated with the apparent comparative fortunes of Clinton and Trump. Wolfers believes that may reflect investors’ judgment that a President Trump would have a uniquely negative impact on the economy. Traditionally, he observes, the two presidential candidates are both more centrist, offering proposals that have been well-parsed by the electorate and investors.
“Normally,” Wolfers adds, “we have two candidates who both have the confidence of the markets,” even if investors generally tilt toward Republicans, as the party of low taxes and other investor-friendly policies. That comfortable environment has been upended by the Trump candidacy.
Wolfers does believe there is a better proxy in the financial markets for the presidential election: the Mexican Peso, which would be dramatically affected by policies Trump has espoused, including restrictions on trade and immigration from Mexico. Wolfers and Zitzewitz cite estimates that the peso could be worth 30% higher under a Clinton presidency.
Indeed, the peso’s trend line has tracked the prediction markets assessment of the presidential race even more closely than the S&P 500. “On Tuesday night,” Wolfers told me, “I’ll be watching the prediction markets and the Mexican peso.”
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