The upcoming presidential election offers some very stark choices. Both sides have their reasons why the world will end if their candidate isn’t elected, so everyone is pretty nervous about the election results.
One of the biggest points of contention is the candidates’ contrasting ideas on the economy. It’s easy to paint an ugly picture of what the world and your retirement portfolio will look like if the wrong candidate becomes president.
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But it’s important to take a step back and look at everything in context. So let’s take a deep breath and try to take an objective look at how the election could affect your portfolio.
No one can predict what’s going to happen in the future, but the markets are already pricing in their best estimates of how likely either candidate is to win and how bad that will be for the markets.
I don’t always say the nicest things about active managers, but they are (generally) pretty smart folks. There’s always someone constantly looking at anything and everything that might conceivably impact the economy or the markets. And by trading on that information, they price in all of the available information out there.
One of the key pieces of information is how likely each candidate is to win. And luckily, there are all sorts of places that you can go and get different estimates – you can get aggregated polling data from places like Five Thirty Eight, you can get futures trading prices based on who will win , straight up betting odds from pretty much anyone in Europe, and gobs of unsolicited advice and information from pretty much everywhere else.
This doesn’t mean that the odds will stay the same, but it does mean the changing odds will affect market prices.
But it’s not just the likelihood that one candidate will get elected that the markets care about. It’s also what they think will happen when one of them actually gets into office. This is a lot harder to assess, especially considering that candidates only keep campaign promises about two thirds of the time.
We don’t have our usual statistical models and quantitative data to rely on, but the markets will still do their best to guess the likely outcome. A lot of this depends on what Congress looks like, so that needs to be included in the estimates. Combine that with the potential results from the election, put it in the oven, and out pops the market’s best estimate of security prices.