The Iowa Electronic Markets (IEM) is a platform that allows people to wager real money on the outcome of various political elections. Instead of simply asking people their views using a poll, the IEM tracks where people are actually putting their money. The chart below shows the odds (since the start of the year) of the Democratic candidate emerging victorious in November with an overlay of the S&P 500.
We have been providing regular updates to this chart for some time now, and up until recently there was a strong similarity between the performance of the S&P 500 and how the democratic candidate (presumably Hillary Clinton) was faring in the polls. When the odds of the Democratic candidate increased, the market rallied and vice versa. Over the last two weeks, though, the contract for the Democratic candidate winning in November has not only come under pressure, but it has outright crashed from a high of 74.0% on 5/10 to just 56.1% through yesterday. When the Democratic contract had its initial decline on 5/11, we figured it was a one-day blip, but since then it has gone on to make new lows. Before reading too much into the decline in the IEM, we would note that other betting markets haven’t seen nearly as sharp of a move as IEM (although they have all been moving in the same direction), so the IEM is certainly the outlier right now. That being said, the outlook for Republican candidate Donald Trump has shown considerable improvement in recent days, and Trump has actually moved into the lead by 0.2 points in the Real Clear Politics average of general election polls.
What, if any, are the stock market implications of the changes in the election betting markets? Without getting into any sort of political debate, we would note that from strictly a historical perspective, equity market performance has been better under Democratic Presidents versus Republican Presidents. In addition, there has been an argument made that Clinton would represent a more predictable choice for the economy and markets over Trump. Obviously, there are exceptions to every rule, but the equity market’s rally has definitely run out of steam as the outcome of this fall’s election has become less certain. Thankfully for market bulls, the correlation between the two has not been nearly as strong in the last two weeks as it was from the start of the year through early May.