Investors: Be Wary of Market Predictions This Election Season
Across the global financial sector, there is rampant speculation about the effects the 2024 presidential election will have on U.S stock markets. Many think that just knowing which candidate wins will tell us where markets will go. The truth, however, is more complicated.
Numerous financial journals have written their opinions on what will happen to U.S. markets if former President Donald Trump wins or Vice President Kamala Harris wins. These speculations are made based on the policies the candidates support. For example, suppose Trump is lenient with regulating big businesses, it can be speculated that Trump will be good for markets.
A recent Wall Street Journal article discussed how some hedge funds are betting that if Trump wins, the high tariffs he plans to make will increase domestic manufacturing and prices of commodities like steel. Trump is also pro-big business, so investors think this will lead to more corporate activity, which might push markets upwards.
On the other hand, an article by ABC predicts that markets will go up under Harris “just as they have under President Joe Biden.” The author added, however, “a potential hike in corporate taxes and robust regulatory enforcement could limit the gains.”
These general predictions, however, have one glaring problem. Presidents don’t simply have one policy, but many. Although some may have positive effects on markets, others may be deleterious. This means that if you are betting on the entire S&P 500 going up in the event of a Trump victory, and you think Trump will be good for big businesses, you may be surprised if certain industries come down because Trump also favors high tariffs, which will increase prices of certain goods and services. For example, the price of commodities like steel might go up, which might increase development costs, which would hurt the earnings of construction companies.
Investors must think long and hard about all the effects of all the candidates’ different policies if they want to guess where markets will go.
There is a famous story involving the notorious Sam Bankman-Fried and his days at the prestigious trading firm Jane Street. Before the 2016 election, Fried built a model which was able to call a state’s results minutes before major news publications. He was able to successfully predict that Trump was going to win. He used the information to bet against U.S. markets, and even though he was right about Trump winning the election, he still lost the firm $300 million. It was the largest single loss in the firm’s history. In the first few hours after election results were published, markets went down as Bankman-Fried predicted, but shortly after that, markets surged.
That story highlights a problem with betting on the whole market based on which candidate wins. The multiplicity of each presidential administration’s policies make it hard to predict how the market will react immediately after the election. This may be why markets are so volatile after elections. What might have worked better for Bankman-Fried would have been to bet on a single industry or commodity that would have been more predictably affected by Trump’s policies.
It can be tempting to pour money into markets prior to elections. While it’s true that many investors make a few bucks betting on the markets, it’s essential to understand why markets move during election season before taking any action. Beware, think carefully and consider pinpointing precise industries that would most likely benefit.
Photo Caption: The markets could move depending on who wins the presidential election.
Photo Credit: sinisamaric1 / Pixabay
