The Stock Market as a Prediction Market for the US Presidential Election
https://fivethirtyeight.com/features/even-without-intrade-billions-will-be-bet-on-2016-race/
This 2013 article by Nate Silver predicted that the 2016 presidential election would have lots of money bet on it. Even though the largest prediction market, Intrade, was banned from the US, there were still places where people could bet on the US election. Most obviously, other prediction markets still exist; but also, the stock market was affected by the US election.
As pointed out in the article, when Barack Obama won the 2012 election, the market caps of banks and fossil fuel companies decreased by billions by the end of election night, while health care companies increased in valuation. This kind of trading is far larger in scale than anything that happened on Intrade.
Now that the 2016 election is over, we can see that Nate Silver was right, but in a different way than many expected. CNN Money published an article at 8:37 am after election night titled “Global markets drop as US election results shock investors” (http://money.cnn.com/2016/11/08/investing/global-markets-stocks-trump-clinton-us-presidential-election/index.html). At their low point on election night, Dow futures were down 900 points, as investors were uncertain about Trump leadership. The article mentioned that the Mexican peso fell 9%, evidently in response to Trump’s anti-Mexico rhetoric and plans to renegotiate or end NAFTA.
However, at 4:10 pm later that day, CNN Money published another article, titled “Wall Street welcomes Trump with a bang” (http://money.cnn.com/2016/11/09/investing/dow-jones-trump-wins-election/index.html). Dow futures had more than recovered from their low from the previous night. The article quotes David Bianco, chief US equity strategist at Deutsche Bank, who said that “The selloff last night was a hysterical reaction… There are a lot of potentially damaging policies that could be introduced, but we think sober minds will prevail.” Stocks in big banks increased, as Trump had promised to roll back Dodd-Frank regulations. Stocks in biotechnology and prison companies increased, since these were industries Hillary Clinton had attacked during her campaign. Defense contractors showed increases as well as investors expected Trump to dump more money on the military. However, the Mexican peso did not recover since the previous article because Trump was expected to be a problem for the Mexican economy. Stocks in selected hospital operators decreased as investors expected Trump to tear apart or repeal Obamacare.
The moral of the story is that people’s predictions about political elections are reflected in the stock market. Whether investors like it or not, political events do influence the business world, and investors must make predictions about the political world to account for them.