The GOP is traditionally known as the party of Wall Street, but this year investors, for the most part, are betting against its standard bearer.
“The market appears to have decided that not only [Hillary] Clinton will win, but that it won’t be close,” David Woo, a strategist at Bank of America Merrill Lynch said in a report distributed Monday. “Investors like landslide victories.”
Woo noted that the S&P 500 has risen more than 4% since July 5, which marks the beginning of the 90-trading day countdown to the election on Nov. 8. During years when presidential candidates won by a margin of more than 80% of Electoral College votes, the S&P 500 posted average returns of 8.4% in the 90 days leading up to the election, as this chart illustrates:
The last time stocks outperformed the current rally at the halfway point is when Ronald Reagan won in a landslide against Walter Mondale in 1984.
“To us, this implies that the market is expecting Hillary Clinton to either maintain or increase her already sizeable lead over Donald Trump in the opinion polls,” Woo said, citing the Iowa Electronic Markets, which indicates that Clinton has an 80% chance of beating Trump.
The IEM is a futures market operated by the University of Iowa Tippie College of Business for research purposes.
Earlier this year, Sam Stovall, U.S. equity strategist at S&P Global Market Intelligence, noted that the S&P 500 SPX, +0.52% has a fairly good track record of predicting election results.
Since 1944, the incumbent person or party was reelected 82% of the time when the S&P 500 rose between July 31 and Oct. 31, according to Stovall. The only exceptions were in 1968 and 1980, when there were popular third-party candidates in the picture.
“Whenever the S&P 500 fell in price during these three months, however, it signaled the replacement of the incumbent 86% of the time,” he said.
The latest numbers show Clinton leading Trump in most polls, according to news and data aggregator RealClearPolitics.
The S&P 500 hit a record high of 2,193.81 on Aug. 15, and is poised to extend its rally for a sixth straight month.
Meanwhile, the market is also expecting a split Congress and very little change in policy, according to Woo.
The volatility of the euro-dollar pairing EURUSD, -0.0268% which the strategist views as a good proxy to measure the risk of change in the U.S. versus the rest of the world, is at a 2016 low, implying subdued expectations for policy change.
“The combination of a Democratic president and a split Congress likely means gridlock,” Woo said. “If this scenario materializes, the experience of the past six years suggests there is little chance of a major change in the fundamental economic policies of the most important country in the world in the foreseeable future.”
As a result, investors could expect lower interest rates and a weaker dollar. But in the event the same party wins both the White House and Congress, the greenback will strengthen and rates will rise, Woo said. |
