Election Eve: Creating and Tracking Candidate Indices
The US Election has gotten more interesting in recent days. What many people thought to be a lock for Clinton had started to show some signs of uncertainty, and a falling market (9 consecutive down days) was attributed to election news. Today, as early voting numbers and the latest FBI release favors Clinton, this trend has abruptly and significantly reversed.
We've revisited the ICGLux election sentiment indicator that we blogged about previously. When we compare this data to polls, we see that the data is capturing movements in the polls along with other data not being captured by the polls.
We took the seven-day moving average for the candidate’s sentiment indices and looked at US stocks with a market cap of over $500 million with a significant relationship to the candidate’s sentiment index. We then created two equal weight indices as of June 1, 2016, one for Clinton and one for Trump.
As you can see, Trump portfolio stocks took a deep dive in early October, around the time that a now famous Access Hollywood tape was released to the public. In the past two weeks, some of the Trump favorable stocks have been outperforming while Clinton stocks have lagged. With the noise around the Comey letter in late October, market participants seemed worried that a Clinton victory might not be as forgone a conclusion as had previously been assumed.
What’s the difference between these indices?
The Trump portfolio contains many stocks from the oil and gas sectors, as well as a coal and other non-energy mining companies. One theory is that some investors believe the the regulatory regime under Donald Trump would be far more favorable to corporations in these industries. Their exposure to oil prices is significantly higher than the market average. Their overall beta to oil is higher than average, as is their volatility.
The Clinton portfolio contains many more finance companies, indicating that those in the finance industry may feel safer with a known quantity at the head of the executive branch.
H&R Block is one of the stocks in the Clinton portfolio. This makes sense, because under the likely scenario of Clinton coming to power with a divided government, we would not expect any major tax reform which might impact their current business model.
Come November 9th, we’ll hopefully know the winner to the 2016 election. Most market watchers will predict that the candidate who is winning in the polls and ahead in prediction markets will win. But it’s important to keep in mind that when everybody knows something, the market is usually way ahead of them.