Skip to main content



Election Predictions in the Stock Market

https://www.wsj.com/articles/right-on-the-election-dead-wrong-on-the-market-reaction-1541691477

 

Before the 2018 midterm elections, there were many predictions about who would gain control of the house and senate. The Democrats had about a 60% chance of taking over the house, while republicans had an overbearing 90% chance of remaining the majority party in the senate. In fact, this scenario is exactly what happened. However, the market response to the midterms can be exponentially more difficult to gage than the actual voting patterns of American citizens. Many predicted that a red-wave would lead to the greatest market profit as there would be hope for more corporate tax cuts. Despite these predictions, the market boomed after the election.

There are a couple reasons why the market flourished, many having to do directly with the beliefs of market investors. After the last election, in 2016, the stock market did really well for the rest of that year. If investors believed that this pattern was likely to repeat itself, they may be more likely to self-assuredly put more money into the market after the election. On the other hand, investors might not have been so sure about the election results, but more so nervous about the election’s unknown effect on the financial market. Therefore, these investors would have held their investments until the stock market effect was present. Once seeing the expected result, that the democrats took the house and republicans the senate, many investors could put their money back into the market without so much worry about their expected profits. A third and more unlikely scenario is that many investors truly thought there was going to be a democratic sweep, which would mean lower profits in the stock market. In preparation for an expected loss, these investors would take money out of the market or withhold investments, so they wouldn’t face as many losses after the election.

The stock market around election time is a magnificent example of a prediction market. Since the probabilities of the election aren’t affected by the stock market, it is an exogenous market. In the stock market, all the individual investors have to make decisions about what they believe will happen in the future. These bets are made with a great deal of uncertainty. In the case above, investors have to make decisions based upon their personal beliefs about the probable results of the midterm elections. Some investors thought the election would help the market, some were hesitant to believe who would succeed in the elections, and some may have been close certain that one party would sweep congress. However, all of these personal beliefs come with uncertainty. Obviously, after knowing the election results, there was no party sweep. However, before the election, there is no way of knowing who will show up to vote and who those citizens will throw their support behind. Many experts who predicted the market, such as the author of this article, Wall Street Journal’s James Mackintosh, truly thought republican wins would benefit the markets the most. It seemed that the hope of future tax cuts made the price of believing in republican wins optimal in comparison to democrat wins. However, individual beliefs in a market can have a tremendous impact on the market itself.

Comments

Leave a Reply

Blogging Calendar

November 2018
M T W T F S S
« Oct   Dec »
 1234
567891011
12131415161718
19202122232425
2627282930  

Archives