The first presidential debate between President Donald Trump and Democratic challenger Joe Biden provided some of the clearest evidence yet of how the stock market would react if Biden wins the presidency.
Trump tweeted overnight that he and the first lady had tested positive for the coronavirus that causes the disease COVID-19 and would self-isolate, injecting fresh uncertainty into a race, with polls consistently showing Biden leads nationally and in most battleground states.
The presidential debate was held between 9 p.m. and 10:30 p.m. Eastern time on a Tuesday evening, during which there was no other major market-moving economic news. By tracking S&P 500 futures contracts
during those 90 minutes, along with the Trump and Biden contracts at various electronic betting markets, we get crucial insight into what investors collectively think of a possible Biden presidency.
Some — including Trump — have predicted that the U.S. stock market would “crash” if he is not re-elected. But the market’s reaction during the debate is not consistent with this prediction, as you can see from the accompanying chart. The red line plots the spread between, on the one hand, Biden’s recent odds of winning according to the various electronic futures markets, and Trump’s odds. That spread widened from 12.5 percentage points as the debate began to 18.1 points at its end. (The data are courtesy of Bonus.com, a website that aggregates the odds from Betfair, Betway, Smarkets and PredictIt.)
As you can also see from the chart, S&P 500 futures during the debate rose to 3,355 from 3,335. That’s not what you would expect to see if investors collectively thought that a President Biden would cause U.S. stocks to crash.
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To be sure, the stock market in the hours following that debate gyrated wildly. At one point in the early morning, East Coast time, it was down sharply. Then shot back up and by the end of the trading session the next day was up strongly.
To get insight into what these post-debate gyrations might mean, I checked in with Eric Zitzewitz, an economics professor at Dartmouth College. Zitzewitz two decades ago pioneered the use of the electronic futures markets to analyze the stock market’s likely reaction to subsequent events.
In an email, Zitzewitz said that “markets are noisy enough that those movements could be to other news too. So unfortunately, I think we have to focus on the movement during the debate, and live with the fact that it was a quick-reaction that might have been subsequently rethought. Par for the course with these sorts of event studies, unfortunately.”
As for the S&P 500’s rise during the debate itself, Zitzewitz added that it too could be caused by a number of different factors. Since he noted, “we haven’t seen much of Biden in an unscripted format for a while,” it’s conceivable that the stock market was “reacting partly to the fact that he did not seem to have deteriorated as much as one might have worried.” If so, then it would be a mistake to directly attribute the S&P 500’s rise to the increased Biden odds of winning.
Still, Zitzewitz concluded, “one doesn’t see anything in these market movements that suggests the market is terrified of a Biden win.”
This doesn’t mean the stock market won’t fall in coming months, of course. What it means is that, to the extent we can mine the data for insight into the future, any such decline would not be caused by who wins the presidential election.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at email@example.com
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