Stock Markets Look To Favor Hillary Clinton In This Election

Historically speaking, the US stock markets (ie – Wall Street) have reliably favored Republicans in presidential elections, but this year looks different. In fact, in almost every case back to 1880, US equity markets have risen when Republicans win presidential elections and fallen when Democrats win. But new analysis suggests that 2016 will be an exception to this rule.

Normally Wall Street cheers when it looks likely that we’ll get a Republican president. It might be that they believe the Republican will be a better steward of the economy, or that they will have a better chance of getting a tax cut if the GOP nominee wins the White House.

The point is, it is extremely unusual to see Wall Street cheer when it looks more likely that the Republican candidate, in this case Donald Trump, is more likely to lose. Case in point is the first presidential debate which occurred on Monday, September 26.

On that night at 9:00pm EST, Hillary Clinton and Donald Trump walked onto the stage at Hofstra University, in Hempstead, Long Island, for the first of three scheduled debates. A reported 80+ million viewers tuned in to see what would happen in this most-watched presidential debate ever.

Going into that debate, Trump had the momentum. Hillary had fallen, precipitously, from a nearly 90% lock, as predicted by FiveThirtyEight (pollster Nate Silver), to a less than 55% chance of winning the presidency. A coughing spell or a major slip-up might have done Clinton in at that point.
You may recall that in that debate, Trump came out strong early-on (first 20 minutes or so) but then unraveled when Hillary accused him of not paying income taxes for the last decade.

During the debate, the S&P 500 futures rallied strongly as Hillary gained the edge. [You may be thinking that the stock markets were closed during the debate which was from 9:00pm-10:30pm EST. But the S&P 500 futures trade virtually around the clock.]

One well-known economist – Justin Wolfers of the University of Michigan — tracked the S&P 500 futures minute-by-minute during the first debate, and here’s what he found.

As you can see, the S&P 500 futures drifted lower in the hours just before the debate. Yet not long after the debate started, the S&P 500 (purple line) started to soar higher, and the betting markets raised the odds of a Clinton election victory (blue line) significantly. In fact, with each Hillary blow on Trump in the debate, her odds of victory increased.

Put differently, the stock market was holding its breath during those first moments when Trump seemed to be unusually focused and cogent. Soon, however, Trump began to unravel as Clinton hammered him, and the price of S&P 500 futures shot upward. When Trump admitted to using a large loss carry-forward to reduce his taxes, the price of futures soared.

In total, over the course of the debate, the price of the S&P futures rose 0.71%, which in the stock market is an enormous increase in so short a period of time (90 minutes). Investors were betting Trump’s chances of being elected had fallen significantly, and that prediction apparently gave them hope for their investments.

For the record, it was not just US stocks that rallied that night. UK and Asian stock markets rose, crude oil rose, the currencies of trading partners such as Mexico, South Korea, and Canada rose against the dollar, and expected future US stock market volatility dropped sharply. Professor Wolfers surmised:

Given the magnitude of the price movements [that night], we estimate that market participants believe that a Trump victory would reduce the value of the S&P 500, the UK, and Asian stock markets by 10-15%, would reduce the oil price by $4, would lead to a 25% decline in the Mexican Peso, and would significantly increase expected future stock market volatility.

I have no idea how Professor Wolfers came up with his specific predictions in the paragraph above, and I don’t put a lot of stock in them. Yet it does seem that Wall Street is betting on Hillary this year for reasons I don’t completely understand.

Both candidates are wildly unpopular by historical standards. Maybe, as someone said to me recently, “Hillary is the Devil we know.”

The conventional wisdom is that stocks will fall if the Democrat wins the election. But this year appears to be the exception and stocks will likely move higher if Hillary is elected. We’ll see.