From stocks to bonds, markets may again be misreading the US election. Hedge your bets

Name: ‘I'll kiss everyone’, says Trump returning to campaign trail after bout with Covid-19
Uploaded: 2020-10-15T14:00:10.000Z
Duration: 2 min 1 s
Description: ‘I'll kiss everyone’, says Trump returning to campaign trail after bout with Covid-19

In a little over a fortnight, markets have gone from pricing in a messy election to betting that the Democrats will sweep to power

Investors should be careful what they wish for. A ‘blue wave’ could make a growth-sapping agenda more likely

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Beatrice Lumpkin, a 102-year-old former teacher, votes by mail in Chicago on October 1, ahead of the US presidential election on November 3. Photo: Chicago Teachers Union via Reuters

Nicholas Spiro

Published: 10:00pm, 15 Oct 2020Updated: 5:32am, 16 Oct 2020

Sharp and sudden shifts in investor sentiment should be treated with caution. Nowhere is a healthy dose of scepticism more justified than on financial markets’ assessments of political risk, particularly when it comes to next month’s United States presidential election, which remains unpredictable and could easily spring a surprise.

Four years ago, investors’ spectacular failure to predict the outcome of America’s election was matched only by their erroneous assumption that markets would tank if Donald Trump won the presidency.

This year, investors, scarred by the shock of 2016, have been overly sensitive to shifts in opinion polls. In political prediction markets, where punters trade futures tied to different outcomes, betting odds have oscillated wildly.

In May, Trump had a sizeable lead. Yet, by early August, Democratic candidate Joe Biden enjoyed a 25-point advantage. A month later, the race was seen as a tie. Today, however, Biden is ahead by more than 30 points, data from Real Clear Politics shows.

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‘I'll kiss everyone’, says Trump returning to campaign trail after bout with Covid-19

In the space of a little over a fortnight, markets have gone from pricing in a messy election to betting that the Democrats will not only win the White House but also secure control of both houses of Congress too, in a so-called blue wave. The speed and scale of the shift in sentiment is striking, and is reflected across asset classes.

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