It's 2016—election year. Who's going to win the presidential election? A more relevant question may be, will it impact the markets and your investments?
Good morning. My name is Paul Carroll. I'm the CEO and founder of Efficient Wealth Management, a boutique wealth management firm based here in The Woodlands, Texas. There's an interesting tool available to those of you who would like to know what's going to happen next in the election, and it's called the Iowa Electronic Markets.
The University of Iowa has put together this financial exchange, the Iowa Electronic Markets, as a marketplace to predict the outcome of the election. It's interesting. Studies show that when people answer opinion polls, their answers are very different from when people put their money on the outcome. When people put their money on the outcome, they're much more likely to be correct. So if you want to know what the market thinks and what is discounted, then go to the Iowa Electronic Markets website to take a look.
Let me show you very briefly. It's a pretty slick site. I'm going to put the link below this video on our website. To find out what's going on in the electronic markets, we’re going to want to log in to the Iowa Electronic Markets.
What I normally find useful is to go to the US Presidential Election Markets, the second one down here, and go to the data. When you go to the data, the data that's relevant right now is both the presidential winner-take-all and the nomination markets. If we go to the nomination markets, we can see what's going on with the Democratic Convention. I like to click on the graph. What we're seeing here is, the markets are predicting a 75% probability that Clinton will win the Democratic nomination. That's no great surprise. Unless something remarkable occurs, Clinton probably will.
However, if we go to the Republican Convention, we see a much more interesting tale here. What we're seeing is, up until the last primary, Rubio really was the pundits' choice. It's interesting that Rubio is still scoring 40% probability, almost double the next-best probability, and that's Trump. Cruz, for whatever reason, is down to as low as 10%. This is really early in the game, and it's very probable that these are going to change substantially, but it's very interesting intel.
If we go back to the markets and we actually get to the presidential election markets, we get the presidential election winner-take-all market overview. That market overview is telling us that the markets are showing a 60/40 probability in favor of the Democrats winning the election, and that being very likely Hillary Clinton, but as you can see from the volatility here, this is by no means assured. Significant changes in the marketplace can occur due to historical events. What is interesting is, the closer you get to the election, the more reliable the Iowa Electronic Markets become.
Why is this relevant to you as an investor? What does this tell us about the outcome of the election? One, it's too early to tell. Two, always remember, historically speaking, it's the economy that drives the election results. If the bear market actually precedes a true recession, and I don't mean the regional recession that's occurring in Texas but a nationwide recession, then it's going to make it a lot more difficult for the Democrats to win the presidency. If, however, the bear market does recover this summer, and in fact provides an opportunity for a snap-back, and if the economy does avoid a recession, then the odds are very, very high that Hillary Clinton will be the next president of the United States.
What difference does this make to you as an investor? I don't mean this politically, but what does this do to your portfolio? It's interesting. Though there are some studies that have suggested that Democratic elections or Democratic wins in the election result in subsequent stock market gains, the Federal Reserve actually did a much more thorough study that goes all the way back to 1852 and corrects for volatility, and the results of that study really came down to this: it doesn't make any difference.
What we do know is, markets tend to be relatively efficient. So if you're concerned about either a Republican election or a Democratic election result, remember that according to the Iowa Electronic Markets, these results are already probabilistically discounted. In other words, what's going to happen next is affecting this summer's and this fall's stock market returns. There's really no way to game it at the last minute. At the last minute, the Iowa Electronic Markets and most pundits will pretty much know who's going to win the election, and that victory or defeat, depending on your point of view, will be priced into the markets already.
It's a beautiful week . We wish you the best of investment success. Thank you.
Foster, Lauren. "Does the US Presidential Election Impact the Stock Market?" CFA Institute. https://blogs.cfainstitute.org/investor/2012/08/31/weekend-reading-does-the-us-presidential-election-affect-the-stock-market/ (accessed February 8, 2016).
Nickles, Marshall. "Presidential Elections and Stock Market Cycles." Graziadio Business Review. https://gbr.pepperdine.edu/2010/08/presidential-elections-and-stock-market-cycles/ (accessed February 8, 2016).
The University of Iowa. Iowa Electronic Markets. https://tippie.uiowa.edu/iem/ (accessed February 8, 2016).
Note: We do not sponsor nor recommend investing in IEM, this is just for educational purposes.