Pre-Election Odds and Market Analysis Update

Its been awhile since we’ve had an analysis on the Presidential election odds and the movements on these odds in the Betfair market.  And there hasn’t been an update because… quite frankly, since the last update, there hasn’t been much to report.  The odds have, for the most part, flip-flopped between 15-20% for Trump, with the inverse (80-85%) going to Hillary, with a less than 1% probability for win designated to the remaining “field” of candidates.  However that all changed over the past few days, as even more Wikileaks from John Podesta’s emails have been released, early ballots are beginning to be counted, and Trump started soaring in the polls.  Once again, the odds are on the move.

However, this time, with an odds analysis, I will be including a “market analysis” as well.  Recently, I read a ZeroHedge article which detailed how certain markets, notably the S&P Index and US Dollar Index, will need to move to imply a Trump presidency.  Notably, they stated the following: “S&P needs to hit 2,000; 30Y yields top 2.50%, and/or USD Index weakness is all that is needed for markets to imply a Trump win”.  With this in mind, we will revisit the Presidential election odds on Betfair for the final time (barring an unforeseen development between now and Election Day), with an eye on how capital markets will react to the election’s result.

As of 11/2/2016, 10:17 AM Eastern, the odds (including a chart of Trump Odds) were as seen below:

Again, I’ll put the numbers in percentage terms of chance to win the election, to simplify.  All percentages are approximates, with priors coming from odds at 10/8/2016 at 10:37PM Eastern:

• Hillary Clinton:  71.7%  (prior: 78.4%)
• Donald Trump:  27.4%  (prior: 17.5%)

Also, as of 11/2/2016, 10:37AM Eastern, the following markets had the following quotes, with priors again coming form 10/7/2016 at 5:00PM Eastern (final market print before weekend close):

• S&P 500 Index: 2105.25  (prior: 2153.74)
• US Treasury Yield 30 Years (^TYX): 2.57  (prior: 2.47)
• US Dollar Index ( USDX Dec 16 Future): 97.25  (prior: 96.485)
• Gold (COMEX Dec 16 Future): 1303.1  (prior: 1263.8)

Note: I have added in Gold, as its function as a currency, safe haven, and fear index is applicable in this analysis.

After looking at the new odds, and at the current and prior market levels, and using ZeroHedge’s article as a rough indicator/guide, I asked myself the question: how will the markets react once the result of the election is official?  Below are my observations:

If Trump wins, and the S&P sells off to 2000 (or lower), there are several other results that can be implied.  On 10/25, just around the time of the turn in fortunes for Hillary, markets had all but discounted and priced in her victory.  The S&P had made recent highs in the 2150s, the US 30 year yields had just broke the 2.50 mark, the USDX peaked in the 99 area, and Dec Gold was in the 1270 area.  Since then, the S&P has sold off, 30 year yields have risen, the USDX has fallen, and Gold has risen, all to their current levels.  With the 30 year well above 2.50, we can assume there are other factors in play there, notably rate hike expectations, and disregard it as long as it holds that level.

However, the other markets would still experience substantial moves if Trump wins.  While markets do not operate in a vacuum, as we have just seen with the 30 year, there is a lot that can be implied given the moves in the markets.  With the percentage of a Trump victory increasing 10%, with another 73% to go, a lot can be inferred from these recent moves in the price action.  If you extrapolate the moves in the markets, even if you remove a large percentage to external forces, and you assume markets would move 3-5 times the recent move, in the same direction… there is a lot moving still to go.  The S&P itself could be expected to fall even further than 2000, as the recent decline on a Trump odds increase of only 10% shows, and could trade below 1950 if Trump wins.  The USDX could expect to fall to recent lows, on the premise that a weaker stock market would take a December rate hike off the table, though that could be blunted if expectations of Yellen being replaced by a more hawkish Fed chair materialize.  And, on dollar weakness and the “fear” of a Trump Presidency,  Gold could trade to around 1360, which was coincidentally also near the Brexit high, and could go even higher, depending on the move in the USDX.

If Hillary wins, the markets will likely revert near, though not exactly to, their levels before Trump’s victory was discounted.  An S&P around 2130-40, USDX in the 98.5 area, and Gold in the 1260-80 area would all be likely.  Again, markets do not operate in a vacuum, but the markets mentioned should expect to move towards the prior levels that had already all but discounted a Hillary presidency.  In particular, the market would reprice already high December rate hike odds to a near certainty; that, and the perceived “continuity” of a Hillary Presidency would lead to a stronger dollar, and conversely, a weaker gold price, possibly even below a 1260 low target.

In effect, the markets would expect a return to “business as usual” stance, as a 2nd Clinton Administration is largely believed to merely be a continuation of Obama policies.  The initial knee-jerk reaction would almost certainly be a stock market rally, though questions would remain.  Will dovish Fed Chair Yellen coupled with an equally dovish (expected) Treasury Secretary Lael Brainard actually raise rates?  And will a new administration would be able to sustain a stock market once again near all-time highs in a sluggish economy?  It is almost impossible to assess how the market would react to the many unknowns of a Hillary Presidency, though there is the argument that any rally could be a selling opportunity.  However, shorts have been burned for years trying to pick the top of (manipulated) markets, and a Hillary Presidency could also just continue that trend.

It is very important to mention that just about all of this analysis goes out the window if the election result is credibly contested by the losing candidate.  Who would be the one contesting the election?  What state(s) would they be contesting, and why?  Would it be a repeat of the 2000 election, with one state’s result and a Supreme Court ruling deciding the outcome?  Would there be multiple contested outcomes, or even a possible mutiny of electoral voters?  If the election result was contested bitterly enough, could Obama seize power and stay on as President, using the guise of waiting for a pending court result or recount to remain in office, and maybe never give it up willingly?  I know, it all sounds ludicrous, but this is the most ludicrous Presidential election anyone has ever seen.  One needs to assume that any serious dispute that could overturn the results would make this analysis almost entirely worthless; no one has any idea what would start it, or how it would shake out, and the markets would react with similar confusion.

Finally, it should be clear why I devoted so much of this article to analysis of what will happen if Trump wins, and didn’t mention nearly as much of what will happen if Hillary wins.  A Hillary Presidency will simply mean more of the same; the special interests, many of whom comprise the S&P 500 Index, are largely the ones donating to Hillary’s candidacy.  The corporate establishment will certainly be “Stronger Together”, and a 2nd Clinton Administration will likely push the stock market back to its all time highs, while she continues her long career of “public” service for none other than herself and the special interests who have empowered and enriched her.

As a longtime Libertarian voter who recently decided to vote for Trump, I realize that Trump certainly has an agenda to change things, and as a political outsider, he has the greatest ability of any recent Presidential candidate to enact real change. As a result of what Trump represents, nearly everyone in the country has something to gain or lose from a Trump Presidency, and a lot of the firms that have the most to lose are the ones that comprise the S&P 500.  Trump is perhaps the only thing standing in the way of their continuing control over the markets, and using their position of power to fatten their bottom line, often at the expense of others who play fair.  I acknowledge that whatever he does to “Make America Great Again”, he will certainly do it without regard to the corporate establishment, which means he will likely step on a lot of corporate “toes” along the way.  The S&P is implying a Trump Presidency as doing just that, which is why a sharp decline similar to the Brexit result is being priced in, and will move markets significantly if Trump wins.

And, honestly… is that really such a bad thing, if you realize what Trump stands for, and who (and what) he is standing up to?