Finance Information from around the globe.
Personal Finance - Financial planning generally involves analyzing an individual's or a family's current financial position, and formulating strategies for future needs within financial constraints. Personal finance is a very personal activity that depends largely on one's earnings, living requirements, goals and individual desires.
Election Year Politics and Stock Market Forecasts
A recent New York Times article discussed the stock market impact of Joe Biden winning the 2020
presidential election. The article quoted Lori Calvasina, head of US equity strategy at RBC Capital Markets,
who said “The market is starting to worry that Trump will not be re-elected. Trump is consistently viewed
as a positive for the stock market.” Before you make changes to your portfolio as a result of these
predictions, consider the following three points:
1. Markets have already priced in the possibility of a Biden presidency.
2. Two-step forecasting is difficult.
3. Your political beliefs can lead to investing mistakes.
Markets Have Already Priced in the Possibility of a Biden Presidency
Right now, if you look at the odds on betting markets, the consensus estimate is that Biden has about a
55% chance of winning the election, while Trump has about a 40% chance. The remaining 5% is allocated
to various candidates and non-candidates. What will wind up moving financial markets is if conditions
change such that the odds of Biden becoming president significantly increase or decrease.
President Trump was a heavy underdog in 2016; betting markets gave him just a 20% chance of winning
the day before the election. And yet, even after the surprise outcome, market moves were relatively
muted the day after the election (the S&P 500 was up 1.1% that day). It should be noted that some
forecasters were predicting a sharp decline if Trump won. Dallas Mavericks owner and TV personality
Mark Cuban said “there is a really good chance we could see a huge, huge correction” in the event of a
Two-Step Forecasting is Difficult
Two-step forecasting is when someone says, “I forecast X, and as a result Y will happen.” Let’s say you’re
60% sure Biden is going to win (which is roughly in line with the consensus estimate). Let’s also assume
that you’re 60% sure a Biden victory means stocks will decline in value. Then assume that if you’re wrong
and Trump wins (a