Do the markets even care about the US election?

0:09If you've been living in a cave on your own with no wifi and your fingers in your ears for the past four years... And I'm here to tell you that finally, finally, the US presidential election has arrived. These Americans really drag this stuff out. My God. Now, every election I can recall in my entire adult life has been billed as the biggest, most important, most consequential ever. But this time, it really does kind of feel like that. So today on the show, we're asking, do markets even care what the result is? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin.

0:46I'm Katie Martin, a markets columnist at the Epti in London, fortifying my garden bunker and stocking up on tinned food just in case. And I'm joined down the line from New York City by none other than Rob Armstrong, Lord of the Unhedged newsletter. Rob, it's a wonderful day for democracy. My heart is swelling with patriotic spirit today. I say that somewhat sarcastically, but only somewhat. I actually do love Election Day and American democracy and all that. So it's a good day, whatever happens. Have you voted already? And have you kept your vote secret from your wife?

1:25I voted like a week ago. And no, it's no secret in our household. Okay. But I'm not telling you a damn thing. No, I wouldn't advise that you do. Now, so look. Do markets care, Katie? You go first. What do you think? Do markets care? What I was thinking was anthropomorphism is bad, okay? So it's bad to talk about markets like they're people. Yeah. They have feelings. Our preferences and so forth. And I think that's particularly true in this case. there's very little that is cut and dried about what this election will mean for markets over the next couple of years some forces point one direction some forces point another you know i think people get hypnotized by the fact that the last time trump was elected markets immediately the u.s stock market immediately rallied quite strongly but that actually made sense and had a very, very simple explanation.

2:28He had promised and he won and the Republicans won the majority, a majority big enough to deliver a big corporate tax cut. And at that point, it's just math. Lower corporate tax, higher earnings per share for American companies equals higher stock market. And that just mechanically is how it goes. And also he wasn't priced in, right? His victory was a surprise. And so it had to be kind of priced in at that point. Yes. Everybody knows it's almost 50-50 now. There was a glorious moment where the betting markets were just obviously wrong. They had it like 65 or 70 percent to 35 percent for Harris, which even if you think Trump is going to win, those odds were just wrong.

3:16And so I was like, I've got to bet on this. And so I took my small amount of money available to a poor journalist, and I wired it to Kalshi, one of these betting sites. And in the two days, it took my money to clear, like the bank transfer to clear, the odds closed by like 15%. Right. Trading acumen strikes again. Yes, my famous trading acumen strikes again. But I did. They were still a bit wide. And I did, even though my guess and I'm not revealing anything, my guess is we're going to get another Trump presidency if you put a gun to my head and force me to answer. I still put money down on Kamala Harris, because when the odds are wrong, you're supposed to put money down.

4:03So that's what I did. I mean, one sort of side issue from this whole discussion is the political betting markets in the States are rubbish and we should never pay attention to them ever again. But they've gotten less rubbish. The point is that when the FT was writing stories about them, right about the time I thought, holy crow, I've got to jump on these odds. It was like there were these whales, you know, very large single bettors were throwing it off. people were talking about how the betting community was not representative of the electorate etc etc but the fact is greed eventually prevails right there were a lot of people like me who are like well if the big dumb whale wants to put a huge bet the other way and the odds are distorted i'll take some of that action i'll take the other side of that yeah i mean it's they're probably not great i'm not saying they have magical powers of prognostication but i'm saying given time inefficient markets tend to close.

5:02We never learn, do we? We get all kind of excited about stuff like, you know, betting markets when they don't really tell you what you think they're telling you. But in the real world of real markets, stocks and bonds and that sort of stuff, and again, allowing for the fact that anthropomorphism, which I've now said twice in one podcast, is bad. The market thinks Trump's going to win, right? Well, I think so, but it's been varying. So there was somehow at markets interpretation, pundit headquarters, there was a decision made a few weeks ago that Trump winning was inflationary and growth positive and that bonds would therefore fall if he won.

5:53And the 10 year bond became this proxy in the mind of the market or people who understand the market for Trump winning. And I agree with that. Does that make me part of kind of some sort of shadowy pundit cabal? No, it just means you're one of the pundit sheep. It's just following the other sheep around. But the 10 year has, you know, it went up wildly when people were thinking Trump was a lock and it has shaded off a little bit recently. And the 10-year yield, I'm sorry, which goes in the opposite direction of prices. So that's come in a little bit. And the interpretation is that is the market saying, whoa, it's not a done deal that Trump is going to win, which seemed to be what the market thought a few weeks ago.

6:46Basically, like if you kind of get a chart of the US 10-year yield and you overlay that, a chart of what the dollar has done over the same period, they're pretty much matched one to one. So the idea that, OK, Trump is inflationary, more inflationary than Harris is the kind of idea. And if that is true, then it means that the Fed is not going to be able to cut interest rates as quickly as the market has been anticipating. So that means weaker bonds, i.e. higher yields, and it means a stronger dollar. And again, in both cases, you know, those big sort of shifts have kind of tailed off a little bit later.

7:21There's a bit more caution now that says, OK, maybe it's not Trump. And the reason this signal is particularly strong right now is that there is already a gap between U.S. interest rates and the rest of the world. In other words, America has strong economic growth. Europe, Japan, China, not so much. So there's already a rate differential, which is why the dollar moves so much. if rates stay even higher in the United States and they keep falling in the rest of the world, right, that means that rate differential is going to draw capital to the United States, and that's going to mean the dollar gets stronger.

7:59So that's the kind of moment that we're in, this moment where America is the economy that's kind of dragging the rest of the world behind it. Now, meanwhile, stocks, as far as I can tell, don't care. No, I think that's right. It is hard. We wrote a newsletter about this the other day, and it is hard to say decisively of any sector of the stock market, this sector is going to do better under Trump than Harris or better under Harris than Trump. I mean, you could say broadly green investments might do better under Harris. But other than that, it's really not obvious. I'll give you an example. Tech.

8:42Right. So the tech people, the thing they really hate is Lena Kahn, who runs antitrust policy under President Biden. They do not like her very much. They hate her so much. and the idea is well if trump gets in she's gone right and that is good for tech but on the other hand there's this guy running for vice president called vance who has said the only person he likes in the biden administration is con and he's a kind of one of these right-wing cultural conservatives who's extremely suspicious of Silicon Valley and all of its works, even though, ironically, he's worked in that world as a venture capitalist.

9:35So his like weird mixed up identity is a wild card in this whole discussion. So it's not clear who is more pro tech. Kamala also said to have links to Silicon Valley and maybe being more friendly to the tech world than her boss Biden was. So it's extremely hard to say. This is like anecdotal, but I think it holds what we would call the real money community, right? Big asset managers, pensions, insurers, those kind of big, slow moving beasts in markets are running into this event pretty much as neutral as they can be. You know, no one's got an edge here. No one knows what's going to happen. And as we've been discussing, right, it's not immediately obvious what the market reaction would be in either event.

10:24So those kind of investors are running into this neutral. Yeah. But hedges, like the macro hedge funds, from what I can gather, are pretty much all in on Trump. Yeah. And that's not to say that they're right or that they're wrong. But what it does mean is those sorts of accounts trade very quickly and very aggressively. So that means that if they're right or if they're wrong, there could be like quite a lot of short term volatility. Shifting to the other side of the boat. One way or another. I mean, you could say you could build this theory. If I'm a hedge fund and I'm looking at Trump, I say he's going to try for another tax cut that gets stocks up.

11:02And you can say he's going to spend a ton of money. And that is relatively bad for bonds and relatively good for equities. Equities may not do great, but they'll do way – so you could see a kind of let's get – let's be long equities. Let's be short bonds. And let's be long the dollar. And let's get that trade in. And yeah, it's a close election. But as macro themes, I would think those would be tradable. But there is another thing to consider here, which is perhaps short term, which is the market just generally likes certainty. So I was talking to one money manager last week and he said, look, if you get a decision, any old decision, that is going to be market positive for like a month.

11:54Just like the market kind of sighing in relief saying we don't have to think about this crap anymore. Right. It is exhausting. It is exhausting. But, you know, whether we're going to get a decision, he said to me, the only way that could possibly happen is if Kamala concedes. Because Harris will concede if she loses, even in a relatively close election. I think we have some historical reason to think that Trump will not concede even if he loses by a significant margin, which will mean this sort of drags on. Yes. I mean, it did happen before. There was that whole thing. Yeah. There was that whole thing.

12:39So I have no idea, like, at what point do we know? And I don't think the market is going to like it very much if we're just churning along not knowing for what could be a couple of weeks. The other thing that I think is a big kind of takeaway for this, that we must remember next time there's an election, because otherwise we'll fall into the same trap all over again, which is investors don't know yes like the markets don't know anything no one knows anything running into this at all yeah they're not magic they're not magic anymore they don't know this any more than they know what the next quarter's earnings at novo nordisk are going to be or lily are going to be you have a lot of a lot of smart people trying to figure out what microsoft's earnings are going to be the next quarter.

13:28But there's still surprises, right? There's an incredible amount of brainpower trying to anticipate these market events. And the market still manages to surprise. And it's the same thing with polls and elections. Speaking of which, we've got the Fed this week, haven't we? We do. They're going to cut 25 basis points. Normally, the Fed announces its rate decisions on a Wednesday, but it's doing it on a Thursday. to like, I got this right. Like they're pushing it out specifically because I didn't know that. I didn't know that they pushed it out because of the election. But that last jobs report, which stank.

14:06Ew, yuck. Yuck. Nasty number. Bad. 12 ,000 jobs only. You're supposed to have more than 12 ,000 jobs. That locks in a rate cut, a 25 pointer, and it probably makes one in December pretty likely. Yeah. Yeah. So you think they'll go 25 basis points, i.e. a quarter of a percentage point, rather than repeating the half point? No, I think now that, and they're going to single strongly that they're on an easing path, and they're going to take it very gradually at 25 a time. Jobs numbers are volatile. Inflation numbers are volatile. If we've learned anything in the last six months, it's that the narrative around those two numbers, employment and inflation, can change entirely very quickly.

14:52So we may be feeling differently in a month, not because of the election, just because then, you know, the next time the jobs report comes out, the next time CPI or PCA inflation comes out, we're telling a whole different story about the economy. Yeah. It's almost as finely balanced as the election, you might say. Beautiful. I love what you've done there. But one thing just to wrap up, tell me please Rob Armstrong when will we know the results when will this nightmare be over I predict that it is going to be drawn out Katie so um buy a lot of tea turn off your television and come back in a couple of weeks we will not know that I'm going to fearlessly predict that we will not know this week well either way you and I are going to be back in a sec with Longshot

15:55All righty, listeners. Now it's time for Long Short, that part of the show where we go long, a thing we love, or short, a thing we hate. Robert Armstrong, what do you got? I have a terrible conflict because I have two longs that contradict each other. First of all, I'm long nuclear power. I think it would be good if we had more of it. I think given our climate problems, I am pro-nuke. At the same time, however, I am very long bees, which are my favorite animal because they are so cute with their little stripes. They both sting and make honey, which makes them like rich fodder for literary metaphors of all kinds.

16:37They live in cool hives. They have a social structure. It's basically they're the coolest animal there is. But then I read this headline in the FT, Meta's plan for nuclear powered AI data center thwarted by rare bees, which is, first of all, the funniest headline I think I've ever read in our newspaper. It's strong. And so the basic idea is they were proposed building, you know, a small nuke to power their AI data center. And it turned out that on the site of the would-be site of this plant, there's some rare bees so they can't build it. So what am I to do, Katie? I'm long bees. I'm long nuclear power.

17:16But now the two are in conflict. What do I do? Pick a side. It's got to be the bees or the nukes. Okay. I guess I'll go with the nukes, man. I think the bees are just going to have to lump it this time. We all have to make sacrifices to solve global warming. Well, also on an animal theme, I am limit long peanut the squirrel. I've missed the peanut story. Tell me about peanut. So look, there's some of it that you're just going to have to Google yourself. Some of it is not suitable for work. Yes. But the summary is there's like a TikTok star MAGA squirrel that was kept in someone's house, someone's apartment somewhere.

18:01And it became a far right talking point after it was killed by the police. But then it all got even more tangled when it turned out that the squirrel based TikToks, I think the squirrel wore a little outfit in these TikToks. I haven't checked them out and I don't intend to because what later transpired is that these TikToks are a kind of almost like a kind of gateway drug into the squirrel owners only fans site. Oh, dear. So it's like everything that's kind of wrong with America and social media, like all in one squirrel. Yes. And for those reasons, I'm limit long peanut. Peanut. R.I.P. Peanut.

18:45Man. Yeah. You burned bright. Katie, this was fun. I'll see you next week when we still won't know who is president and there'll be nothing else to talk about. I just can't bear it. Listeners, assuming the world has not ended, we will be back in your ears on Thursday. So good luck to the states and we'll be back then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's Global Head of Audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free.

19:28A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.

19:51We'll be right back.