The markets assume that former President Donald J. Trump has an even chance of winning the November election.
So far, it appears they don’t care either way.
The political prediction markets — which allow traders to place bets on the outcome of the November election — show that the presidential race is tight.
After trailing for months, President Biden has moved slightly ahead of Mr. Trump in the betting on Predictit, the longest-running commercial prediction market in the United States. On Betfair, a robust British prediction market that is officially closed to U.S. residents, Mr. Biden has moved within one percentage point of Mr. Trump. Polymarket, an offshore market that accepts only cryptocurrency, shows Mr. Trump slightly ahead.
“The prediction markets right now are telling us that the presidential election is basically a tossup,” said Eric Zitzewitz, a Dartmouth economist. “And the stock market isn’t reacting negatively to that at all.”
An Odd Year
This is puzzling in several respects.
Stocks have been booming this calendar year. And with low unemployment, high economic growth and increasing productivity, you would expect that “the presidential incumbent would be a shoo-in,” said Jim Paulsen, an independent economist and a longtime market strategist. “I would argue that if you didn’t know anything else about everything that was going on, and somebody told you about the recent economic numbers, we’d be celebrating it as nirvana.”
But that’s not happening. “It looks like something is broken,” he said.
Looking just at the economy, the culprit could be inflation. It peaked at 9.1 percent in June 2022 — the highest it has been since the 1980s. The Consumer Price Index was still rising at an annual rate of 3.5 percent in March. High inflation, after 40 years without it, has been a shocker. It may be coloring people’s views of the economy — and of the current administration — in a disproportionately big way.
Back in the 1970s, Arthur Okun, an economist in the Johnson and Kennedy administrations, invented what became known as the “misery index.” It was simple: the sum of the unemployment rate and the inflation rate.
Because the unemployment rate is near its lowest point since the 1960s, the misery index is now fairly low. The inflation component may well be skewing popular attitudes in deeper ways than are being captured by that index or any other one.
A Different Kind of Candidate
Obviously, inflation isn’t the only potential anomaly in this election year. Whatever else he may be, Mr. Trump is an unusual candidate.
He faces scores of felony charges for a range of offenses so extensive that there is a cottage industry devoted to keeping track of them. In what will be the first criminal trial of a former president in U.S. history, Mr. Trump is to face charges in a Manhattan court on Monday of covering up a sex scandal during his 2016 presidential campaign.
He is an untraditional candidate in other ways, too. Mr. Trump still denies that he lost the last election. He has spoken approvingly of exercising dictatorial powers, of reducing America’s role in NATO and in other multilateral institutions, of raising tariffs that would reduce free trade, of paring down environmental regulations and antitrust enforcement, and of radically cutting the professional bureaucracy that does much to run the government.
Long-term investing assumes that the future will, at least to some degree, resemble the past. But Mr. Trump promises that in a second administration, he will engineer a profound break with the past — abandoning the Washington-based global consensus that has prevailed since the end of World War II and has enabled financial markets to function and prosper.
The markets are said to abhor uncertainty, while Mr. Trump all but guarantees it. Under these circumstances, major market disruptions would hardly be shocking.
Yet at the moment, the stock market isn’t perturbed by his apparent political strength, which is manifest in an array of public opinion polls showing a race with razor-thin margins — but with Mr. Trump, more often than not, in the lead.
Maybe investors have taken to heart the old Johnny Mercer lyrics: “Accentuate the positive, eliminate the negative.”
With the exception of 2020, the Covid-19 pandemic’s early days, the market did splendidly during the Trump administration. The Dow Jones industrial average returned 12 percent, annualized, from Mr. Trump’s inauguration in January 2017 to Mr. Biden’s in January 2021, according to Bespoke Investment Group. The Dow during President Biden’s term has returned about 7.7 percent, annualized, which is the median for all presidents since 1900.
It’s clear in retrospect that the stock market and the overall economy prospered under President Trump. That appears to be what many investors remember now.
Weighing the Odds
Goldman Sachs has done conventional analyses of the election’s impact on the economy and the markets, using probabilities from Predictit.
Goldman started with the assumption that Mr. Trump was more likely to be the winner, and would probably cut taxes. What to do about taxes will be an issue for the next president because many of the 2017 tax cuts are set to expire at the end of next year. Mr. Trump’s expected tariff increases could conceivably lead to a global trade war.
The analysis assigned a smaller but sizable probability to President Biden’s re-election, which, it said, would probably be accompanied by increases in spending on social services. A landslide victory either way is deemed unlikely. So if at least one house of Congress isn’t controlled by the next president’s party, Congress would be expected to serve as a brake on major changes by whoever occupies the White House next year.
If this kind of thinking is right, then it won’t much matter for investors which candidate wins. But for an investor, it’s possible to buy insurance against outright disaster.
One way is through the options market. Pricing of options on volatility in the S&P 500 shows a spike in contracts that expire next November and December. Such options are expensive. The prices could just reflect the modest assumption that uncertainty about the election’s outcome will cause the stock market to fluctuate more than usual. Trump supporters who fear a Biden victory could be buying these options, too.
Nathan Sonnenberg, chief investment officer of Pitcairn, an asset management firm focused on wealthy families, said in an interview that he didn’t emphasize such options. “The world only ends once,” he said, and you may be wasting your money with them.
Assuming the world doesn’t end, history suggests that you will be better off, as an investor, just staying in the stock market. Some statistics from Bespoke Investment Group are revealing.
Starting with the Eisenhower administration in 1953, if you had put $1,000 into the S&P 500 and kept it there only during Republican administrations, through March 20 it would have been worth $27,400. If you had invested only during Democratic administrations, your stake would have been $61,800. But if you had just held your nose when you found a particular president repugnant and held on all the way through, you would have had $1.69 million.
Sticking with the markets through what could well be one of the most contentious and troubling election campaigns in history may be a great feat. The stock and bond markets have been fairly calm, but in a rough political season, it may take fortitude to be a long-term investor.
