Predictions Of Stock Market Carnage Based On Who’s Elected Are Almost Always Wrong

With recent forecasts of market mayhem if Elizabeth Warren is elected, Bloomberg would like to remind everybody that past predictions of a presidential candidate’s impact on equities are usually wrong. 

The S&P 500 will plunge 25% if the Democrat becomes president, says Paul Tudor Jones, the hedge fund manager. Discovery Capital Management founder Rob Citrone says she’s “the single biggest risk for the market” and calculates the downside at up to 20%. Billionaire Leon Cooperman told CNBC earlier this month that the market would drop 25% if Warren or Bernie Sanders win.

That’s a lot of certainty to attach to predictions Wall Street has shown no ability to get right in the past. The confidence sounds particularly rich considering what investors said about the man Warren aims to dethrone, Donald Trump. –Bloomberg

“Strategists predicting the impact of a presidential election are worse than the pollsters,” said equity strategist Matt Maley of Miller Tabak & Co. “It’s one of the best contrary indicators out there.“

While Bloomberg admits that Warren’s plans to rein in Wall Street and corporate America may ‘kill the economy,’ or that the bull market may ‘die of old age,’ evidence suggests that a president’s politics do little to affect stocks – writing: “Variations in equity performance when a Democrat is in the White House are almost negligible when compared with Republicans, according to research from Vanguard that was published before the 2016 election.”

Moreover, strategists were dead wrong about Trump.

Strategists at RBC Capital Markets LLC said prior to Election Day that a Trump victory would send the S&P 500 down 10 to 12%. Barclays had predicted a drop of as much as 13%. The team at JPMorgan advised investors to sell the rebound that materialized just a few hours after Trump won.

It wasn’t just stock handicappers. Two economics professors, Justin Wolfers and Eric Zitzewitz, wrote a paper on the topic for Brookings in October 2016. They analyzed the futures market during the first presidential debate and extrapolated the reaction to conclude a Trump win would send stocks down 10% to 15%. A Massachusetts Institute of Technology economist posited that a Trump presidency would cause a stock market crash and could plunge the global economy into recession. –Bloomberg

According to the report, the terrible market calls related to a Trump win were in part a reflection of polling data. “Since Trump was viewed as a long shot, many predicted investors would be shocked into selling if he won.”

Citigroup strategists, for example, said the S&P 500 could lose 3-5% immediately on a Trump win, in addition to posing long term risks to stocks. While S&P 500 futures plunged 5% in the hours after Trump’s victory was secured, they rebounded almost immediately – while the index has gone on to gain over 40% since Trump’s election.

Strategists were similarly wrong about President Obama’s reelection when he ran against Mitt Romney in 2012. In September of that year, almost 50% of respondents in a Bloomberg survey said that if Obama won again it would be negative for US financial markets despite the S&P gaining 42% between Obama’s first election and his second.

Among prognosticators who muffed the call was Donald Trump, who said in a November 2012 tweet that both the stock market and the U.S. dollar would plunge following Obama’s second victory. The S&P 500 rose almost 50% in that term, bringing his eight-year return to 112%, while Bloomberg’s dollar index gained 21% in the four years that ended in November 2016. –Bloomberg

“The most nay-saying people to Barack Obama will admit that there was not a transformation of our economy in any way that they would’ve feared the day he got elected. Same thing with the Democrats with Trump. There hasn’t been this transformation that was feared,” said Mark Hackett, chief of investment research at Nationwide Funds Group.

“Our economy is bigger than one person or one election cycle.”