Why it’s difficult to draw market implications from election shocks

There’s been some recent discussion of how the changing fortunes of the Trump campaign might or might not be impacting the markets.  One point I have not seen people address is that these shocks also impact the likelihood of the GOP retaining control of Congress:

Before Friday’s revelations, online bookies had installed Democrats as a 58 percent  favorite to win Senate control. Those odds quickly rose to 69 percent on a site called PredictIt.  If the Democrats win the presidency –now even more likely than before—they only need 50 seats (not 51) to control the Senate: Vice President Tim Kaine would control the tie vote. The markets are now saying that is more than a two-thirds probability.

If the Democrats take the Senate, it’s likely that we will see higher taxes and more regulation than otherwise.  It’s quite possible that the negative impact of that outcome on market sentiment largely offsets any positive effects of Trump losing.  Notice that the 11 point jump in the chance of a Democratic Senate is actually larger than the fall in the odds of Trump being elected.

Keep in mind that in past Congressional election fiascos, the cause of the trouble was not so much people switching their votes to the other party, as demoralized supporters simply staying home.  So even if GOP voters do discriminate between Trump and the Senate races, the GOP could be hurt by even a slightly lower turnout of its voters. The race for the Senate is very close.



11 Responses to “Why it’s difficult to draw market implications from election shocks”

  1. Gravatar of Ray Lopez Ray Lopez
    9. October 2016 at 08:58

    Higher taxes says Sumner. What does Sumner think about our constant Fed budget deficits? Do they ever need to be balanced with higher taxes and less spending (keeping in mind people actually like Big Brother spending money on them, been that way since FDR/LBJ), or not?

  2. Gravatar of TravisV TravisV
    9. October 2016 at 09:02

    Prof. Sumner,

    I don’t quite understand. Wouldn’t the Democrats need to win the Senate AND the House in order to raise taxes?

  3. Gravatar of ssumner ssumner
    9. October 2016 at 09:20

    Travis, That would make it easier, but even the Senate and Presidency is a pretty powerful position in negotiations. Thus a corporate tax reform would be less pro-business in that scenario.

  4. Gravatar of TravisV TravisV
    9. October 2016 at 09:38

    Prof. Sumner,

    Congress is extremely polarized, and that’s only going to get worse and worse. The markets know this.

    Imagine that Hillary wins and the Democrats win the Senate. If the Republicans have the House, then the odds of significant tax changes are extremely, extremely low.

    If we modify that scenario to one where the Republicans win the Senate, the odds of significant tax changes are STILL extremely, extremely low. Maybe the odds would be slightly higher, but only by a hair. I think the difference would be insignificant.

    Personally, I think the only scenario in which there might be significant tax changes is if the Democrats win the Presidency, the Senate and the House in November. And that’s currently quite unlikely.

  5. Gravatar of Jill Jill
    9. October 2016 at 10:10

    They’re Not Even Close: The Democratic vs. Republican Economic Records, 1910-2010

    Democrats are better for the economy. If Hillary wins, the economy and the stock market will do great. It would be better if Dems won both Houses of Congress. That’s very unlikely. But even just the presidency would do a lot of good for the economy.

  6. Gravatar of TravisV TravisV
    9. October 2016 at 10:13

    Gridlock! Gridlock.

  7. Gravatar of ssumner ssumner
    9. October 2016 at 11:01

    Jill, Don’t confuse the (well known) historical record of the stock market under Dems with the effect of an election victory. In recent decades a Democratic Presidential win has knocked about 2% off stock prices, despite the record you describe.

    Travis, I disagree, I think a corporate tax reform bill is about 50-50 over the next 4 years, even if Hillary wins. Recall that the Dems also favor reforming the corporate tax code, and Hillary will need something to negotiate with to get a higher minimum wage, etc.

    Yes, I predict the GOP will also agree to a higher minimum wage. Big government is coming.

  8. Gravatar of TravisV TravisV
    9. October 2016 at 12:57

    Hmm, at PredictWise, the odds that the Democrats will win the House have increased from 13% to 29% over the past week.

    However, the odds of that happening are quite different at https://www.electionbettingodds.com/congress.html ……..

  9. Gravatar of Steve Steve
    11. October 2016 at 10:12

    Well well, the market is plunging as new polls show an absolute landslide loss for Heir Trump.

    Meanwhile election betting odds still has Trump at 15%, which is exactly what I predicted it would do Friday night.

    I’m really baffled what pathway still allows 15% odds for Trump (is Hillary *that* sick???) but… Yay Prediction Markets!

  10. Gravatar of Scott Sumner Scott Sumner
    11. October 2016 at 18:11

    Steve, I’m puzzled too. Why not 3%?

    What is the Kremlin holding back until the last minute, to get their stooge into the White House?

    Maybe there will be so many leaks on both sides that Johnson will end up winning. 🙂

  11. Gravatar of ssumner ssumner
    13. October 2016 at 07:24

    Steve, It’s obvious the market now fears the GOP will lose Congress—Hillary unleashed. The stock market wants Hillary plus a GOP Congress.

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