In various reports for our research clients over the last several weeks, we have been highlighting the recent correlation between the performance of the equity market and Iowa Electronic Markets (IEM) betting contracts on the outcome of this year’s Presidential Election. For those unfamiliar with the IEM, this platform was developed by the Unversity of Iowa to allow students to bet real money on the outcome of different elections. Whereas polls only gauge what people say they are going to do, markets like the IEM tend to be more accurate as they represent actual dollars. Like the old saying goes, Money Talks!
Throughout the first four months of the year, the S&P 500 has been closely tracking the movements in the contract for the Democratic Candidate to win the Election in November. When the Democratic candidate’s odds increase, the market rallies and vice versa. As shown in the chart below, both peaked within a day of each other towards the end of April, and then traded sideways with a downside bias. Then, over the weekend, the odds for the Democratic candidate started to increase, and sure enough, the market followed suit to the upside.
The comparison between the two keeps getting more interesting. Just yesterday, the S&P 500 essentially erased all of Tuesday’s big gain, and that decline in equity prices was accompanied by an absolute nosedive in the price of the contract for the Democratic candidate, which fell from 74% down to 62.9%. That was the biggest one-day decline in that contract’s price this year. Some of the other betting platforms have also shown weakness for the Democratic candidate to come out on top in November, but they aren’t showing nearly the weakness that we have seen in the IEM, so it will be interesting to see how the pricing for this contract settles at the end of the day. There have been some instances in the past where the IEM saw a big one day move that was reversed the following day, but if this move has any legs, it would represent a “yuge” shift in overall sentiment towards the election. If that is the case, unless the market begins to get more of a sense of clarity on the policies of Donald Trump, it could cause some problems for equity prices.