MAGAnomics as negative supply shock
When Trump-O-Mania rules again
The betting market implied probabilities for the outcome of the US Presidential election have been remarkably stable since the Trump-Harris debate. The race has narrowed somewhat since mid-September, as measured by betting market odds and a pick-up in the Trump Media share price from its recent record lows, but remains a coin toss.
By all accounts, the various polling outfits have still not come to terms with the election model bias introduced by Trump’s candidacy in 2016. As Paul Mainwood notes:
‘if the polls stay as they are right now, but polling errors occur as they have historically, then we still have two [previous] cycles where Trump would win outright. Rather notably, these are the only two years where he was in fact involved as a Presidential candidate. His presence in a contest does seem to throw off pollsters.’
My base case remains for a contested election that is decided through legal and administrative processes accompanied by a more or less overt putsch by Trump and his supporters. This week’s ‘October surprise’ was the unsealing of a partially redacted 165 page court filing detailing the ‘private criminal effort’ to overturn the 2020 election. There is no reason to expect Trump to act any differently second time around.
These proceedings do not seem to have changed betting market probabilities, but give a sense of what we can expect in the aftermath of this year’s election in the absence of a decisive result. Some have suggested that a wider war with Iran, another potential ‘October surprise,’ might be helpful to Trump, but that is far from obvious to me. It is certainly a risk to the oil price, but Trump’s betting odds are currently negatively correlated with the USD oil price on a one month rolling basis.
A contested result is first and foremost a volatility event which would seem underpriced given that the implied vol for the S&P 500 the day after the election has been tracking lower than in the run-up in the 2020 election when Trump was very much on the backfoot.
The sideways trend in the betting market probabilities makes it difficult to discern meaningful short-term correlations with asset market pricing. Few market participants are going to place big directional bets based on a coin toss election contest. One month rolling correlations with the yield curve and 5y5y forward inflation expectations, the most obvious of the Trump trades, are currently negative, for what that’s worth. The S&P 500 banks index, a proxy for prospective Trump-induced curve steepening, has mostly underperformed the broader market since the middle of last month.
Equity markets have recently made new record highs even against the backdrop of a very fraught geopolitical environment. All of these risks have been seemingly normalised by markets.