The GOP is traditionally known as the party of Wall Street, but this year investors, for the most part, are betting against the Republican standard-bearer.
“The market appears to have decided not only that [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 was 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 sizable lead over Donald Trump in the opinion polls,” Woo said, citing the Iowa Electronic Markets, an indicator giving Clinton an 80% chance of beating Trump.
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The IEM is a futures market operated for research purposes by the University of Iowa Tippie College of Business.
Earlier this year, Sam Stovall, U.S. equity strategist at S&P Global Market Intelligence, noted that the S&P 500 has a fairly good 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 polling numbers show Clinton leading Trump in most voter surveys, 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 to six straight months. The Dow Jones Industrial Average also is flirting with a slight gain in August—which would be its seventh monthly rise in a row, according to FactSet.
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 , 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 the White House and control of Congress, the greenback will strengthen and rates will rise, Woo said.
– Market Watch
