Market timing and US election

Good Evening RIP friends,

Did you sell all your stock funds? You know that doomsday is coming, don’t you? What are you waiting for??

Let me explain it clear:

  • aryaelectionIf Ronald Drumpf wins, the market is going to crash because he’s insane and none will invest in US.
  • If Hilarious Clinton wins, the market is going to crash because she will tax companies and rich people so that none will invest in US.

Clear, right? S&P 500 is currently overpriced!

Go!

Sell everything!!

It’s obviously an ingenuous lie. Market price already contains this information.

Uh, RIP, you made my heart skip a beat! So the election won’t change my fund value?

Oh no no no, it will surely be hit! It’s just that you don’t know in which direction. And you can bet that the expected value after the election – given all other conditions stay the same – is the current fund’s value.

I’m confused…

Let’s do some math: let’s assume a share of your S&P500 fund is priced 100. Let’s assume the market expectation in case of victory of candidate X is +10%, i.e price would jump at 110 per share. Let’s also assume that in case of victory of candidate Y the market expectation is -20%, i.e. a price of 80 per share. If your price today is 100 it means that there’s a 66% probability that candidate X will win against 33% of Y. Today’s value is the expected value.

If tomorrow a new poll says odds of winning are 60% for X vs 40% for Y and market expectations in case of victory of X or Y are the same +10% and -20%, then the new share price will drop to 98, which is the new expected value (110 * 0.6 + 80 * 0.4).

If, instead, odds of winning for X and Y stay the same but candidate Y announced a new wall on the Canadian border, bringing market expectation in case of victory to -30% instead of -20%, new expected value for the share is 96.666 (110 * 0.666 + 70 * 0.333).

What? Is it really so easy for a candidate to make the market drop?

That’s just a simplification. I hope that in case of such a claim the odds of winning for Y would drop and expected value for your share would actually increase in this scenario. Another level of simplification is that market doesn’t just react on what candidates say. That’s just propaganda. It reacts on true well founded hypothesis on what would happen in case of victory of X or Y. Who’s funding their campaigns, which kind of lobbies they have behind and so on. Market is more stable than our fears.

And don’t confuse expected percentage with chance of winning. Today polls say 48% vs 43% (and 9% third parties) while odds are 86% vs 14% (and 0 third parties).

So… should I sell?

As I’ve already said, trading has costs. By trading a lot you’re expected to lose money, unless you’ve some kind of knowledge that’s not publicly available. Otherwise, selling is just an expensive bet. A less-than-zero sum game. Not selling is a better bet. A more-than-zero sum game.

Like any normal day in the market.

P.S. here some nice stats about historical market performance based on candidate’s party and here the same concept expressed by Trent Hamm in 20 words, while I needed more than 500…

10 comments

  1. I wouldn’t sell anything before the election but the more exciting question is what will Happen the dayas after. If the Markets do crash considerably, it might be a great reason to buy. Generally i only try to time the Market for buying, rather than selling. See january 2016 or brexit vote.

  2. I am making no investment moves. If Grandma-has-a-Secret-Hillary wins I think the markets hold to what we have already been seeing because she is more of the same. She and her policies are so well known and already baked into the system as well as what will be the continued obstructionist attitude in Congress. Same do-nothing government as the last 6 years. That’s what I believe but I am just a freak.
    I think if Smell-My-Finger-Donny won then it would be an interesting and scary ride until he and bromance buddy Putin and Donny’s inner-circle-jerk of misogynist you-name-it mongers figure out their next moves. Then the obstructionist Congress folk of both parties will gang up to do their thing. I’m not happy about things but I’m betting my portfolio on Hillary winning. Polls aren’t always right and anything can happen. Tic-Tac-Lip-Lock-Donny keeps saying he and his movement are like Brexit. Whatever.

    1. ROFL for the middle names 😀
      I think that if Drumpf is seen as a big risk with low chances, it means that in case Hilarious wins there will still be a small bump northbound.

      It’s like a soccer match Manchester United vs Crotone. If you bet on Man Utd you still win something. Maybe 0.1% but still win.

  3. Selling now and getting back in when? The thing is, I do not know it will go up or down after the election…

    I once timed the market with my options portfolio. We all know how that went… not planning to do it again.

    As for investing, I am on hold ever since I decided to join a start up. Due to the increased insecurity, I decided to build up cash. That cash could be needed when the startup does not work out and I need to start my own company to freelance… In a way, I have not to worry right now about investing or not.

    1. I’m invested way too much in US stuff. I should balance a bit, but that’s completely independent on election. Problem is that I expect a high volatility in the next 4-5 weeks and buying/selling in high volatility is almost never a good thing for a buy&hold investor like me.

  4. I’m going to stand pat because I’m horrible at timing the market. I’ve thought for the last 2 years that the market was going to go into a recession. Clearly I’ve been wrong. On top of that whether a President is good or bad, the market seems to go up even albeit slow. So I’ll keep plugging along like normal 🙂 Thanks for sharing your perspective!!!

  5. I love how worked up the mass media is getting about Trump vs Hillary, and how its going to affect the markets. This election is going to be just like Y2K. The next day, nothing will change. The sun will come out, we’ll all go to work, and life will go on.

    1. Not sure.
      Well, I don’t think there will be a drastic change in the long term – because the impact of politics on economy is becoming smaller and smaller over time – but still I assume expectations are completely different in case X or Y wins.

      How I read the small market drop in last few days is EXACTLY the case I indicated where “a new poll says odds of winning are 60% for X vs 40% for Y”, and that’s due to the recent news of the new FBI investigation on Hilarious.

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