Ghost Of 2016’s Midnight Market U-Turn May Haunt 2020 Election, Goldman Says

Over the past couple of months, Donald Trump has resorted to shrill fearmongering when it comes to warning about the supposed perils of electing anyone but him in 2020.

On June 15, for instance, Trump exclaimed that “If anyone but me takes over, there will be a Market Crash the likes of which has not been seen before!” The audacity and hyperbole is astonishing, until you consider the source.

Then, on July 31, the president took to Twitter to comment on the previous night’s Democratic debates which, admittedly, did not make for compelling television. “The people I saw on stage last night… will lead us into an economic sinkhole the likes of which we have never seen before”, Trump said.

Read more: Trump Says Reelect Him Or Risk Depressionary ‘Sinkhole’

In the same series of tweets, the president’s penchant for exaggeration and propensity to accidentally admit to harboring absurd delusions of grandeur was on full display. “If I hadn’t won the 2016 Election, we would be in a Great Recession/Depression right now”, he said, flatly.

To call that a debatable proposition would be to grossly understate the case.

As we noted last month (and on too many occasions to count previously), there isn’t all that much that’s remarkable about Trump’s MAGA economy. It doesn’t take an economic mastermind to engineer 2.5% growth if you’re permitted to pile debt-funded fiscal stimulus atop an economy that’s already running hot. (Trump’s 3% “miracle” was wiped off the board with the latest revision to Q4-over-Q4 growth in 2018.)

While Trump may be lapsing into absurdities when it comes to predicting biblical stock market crashes and depressions in the event he loses in 2020, one thing the president is certainly right about and that he likes to mention whenever this subject comes up, is the fact that everyone got it wrong in 2016, not only in terms of who was going to win, but also with regard to how a potential Trump victory would affect US equities.

On Sunday evening, Goldman was out with a new piece that looks at “how financial markets are likely to respond as President Trump’s odds of reelection vary in the run-up to the election”.

While that’s an interesting topic, the more entertaining section of Goldman’s note (in our estimation anyway) is the recap of 2016.

“Comparing prediction market-implied odds from 2016 with earlier polling results, Trump’s election was the biggest presidential election surprise in at least the past 40 years”, Goldman writes, adding that “the 1976 election is the only other instance of an electoral surprise at all, but even then President Ford was favored only very narrowly to defeat Governor Jimmy Carter”.

The chart in the left pane below is quite something. Indeed, if you don’t get a chuckle out of it, then you probably need to check your pulse. Little wonder that various media reports about election night 2016 suggest Trump was more than a little surprised when it became apparent that he had been elected to the highest office on the planet.

(Goldman)

The annotated chart in the right pane speaks for itself. Markets were terrified at the prospect of Trump becoming president – right up until he actually did.

“[The] negative relationship between stock prices and President Trump’s chances of election continued through Election Day, especially as his election began to appear more plausible—and then very likely—between 8:00pm and 11:00pm”, Goldman goes on to recount. This is one of those chapters in market history that pretty much anyone can recall in vivid detail (it’s a “where were you watching when…?” type of thing), but it never ceases to entertain.

“S&P 500 futures bottomed roughly 4% below the market close price at midnight on November 9, when not only Trump’s victory but also Republican majorities in the Senate and House had become evident”, Goldman continues. “The market quickly repriced, more than recovering its roughly 4pp decline on Election Day through midnight, and finished up 3.8% for the week”.

Goldman also put together a graphic that shows how markets reacted to various news in the lead up to the election using a handful of case studies and comparing the S&P response to the implied odds of a Trump victory.

“In each case, an event that increased the probability of Donald Trump winning the election was followed by a decline in the S&P 500, while an event that increased the probability of Hillary Clinton winning the election was followed by an increase in the S&P 500”, Goldman says, describing the interplay between predicted political outcomes and US equities that persisted right until midnight on election day.

(Goldman)

In hindsight, it isn’t difficult to decipher the market’s abrupt change of heart with regard to Trump. In essence, folks were genuinely concerned about the instability that would almost invariably accompany a Trump presidency, but once the outcome was in the books, everyone immediately pivoted to what his pro-growth/pro-business agenda might mean in the near- to medium-term for equities and the economy. “Markets ultimately interpreted the 2016 election surprise as positive for near-term growth, as nominal interest rates, breakeven inflation, and stock prices all rose, likely anticipating looser fiscal policy from a unified Republican government, compared to expectations for a Democratic president and split Congress”, Goldman notes.

The bank’s analysis is much more than a retrospective. As alluded to above, the thrust of it is to tease out possible sector-level and industry-specific implications for 2020, but the broader point is as straightforward as it is important.

“The consensus misjudged not just the outcome, but also the eventual equity market response, to Trump’s election [and] this may lead investors to be more cautious in 2020 and perceive the outcome of the election as closer to 50-50 odds”, Goldman cautions.

In other words, let’s just call 2020 a coin flip – no matter what the polls end up saying on election eve.