The Best-Laid Plans Of Traders And Pollsters

Escalating rhetoric from Donald Trump and lingering suspicions that, after 2016, the polls can’t be trusted, are keeping market participants on edge.

Although the president’s chances of reelection are now low enough that even Lindsey Graham is telling Fox News he might lose (and that’s to say nothing of Graham’s own trials and tribulations) it’s difficult to escape the feeling that various polling and betting odds don’t tell the whole story.

Importantly, don’t forget that when it comes to near-term, tactical considerations for market participants, the margin matters perhaps more than the outcome. Obviously, the vast majority of humanity has a strong opinion on who they’d like to see prevail next month, but a hypothetical, emotionless trader (e.g., a robot) will care more about the margin of victory/defeat when assessing how to maneuver around the event.

The figure (above) is from the latest edition of BofA’s Global Fund Manager survey and the message is crystal clear. When it comes to outcomes with the potential to inspire volatility, a contested result is seen as particularly dangerous.

While there’s some risk of Biden contesting the results in the event Trump manages to pull off a come-from-behind, narrow victory, the real risk is a close vote that results in a Trump loss. That would open all manner of doors, none of which lead to happy places.

But increasingly, fears of the worst-case outcome (defined in general terms as a prolonged period of uncertainty that drags into December) are seen as overblown, while worries around what I’ve variously described as the “science fiction” scenario (in which Trump simply seizes power) are viewed as wholly far-fetched.

“We are seeing some traders interested in expressing a view which will profit if we get a cleaner and swifter election outcome before the Nov 20 expiration than is priced-in,” Nomura’s Charlie McElligott remarked on Thursday.

For their part, Morgan Stanley said the “pain trade” in vol is lower. “There is much to keep implied vols elevated,” the bank’s Phanikiran Naraparaju and Sheena Shah said Wednesday, flagging what they called a “rampant” second wave of the virus, the US election, and a possible no-deal Brexit. But Morgan “suspect[s] implied vols will struggle to resist the gravitational pull lower.” They’re recommending short vol trades almost across the board, via a variety of expressions in various assets from equities to FX to credit to oil to gold.

Separately, the bank’s Michael Zezas says investors should focus on the Senate, not Trump, given the president’s long odds.

“Control of the Senate will mean the difference between substantial fiscal expansion and fiscal gridlock,” he wrote this week, noting that rates and crude aren’t priced for a Democratic sweep and the read-through of such an outcome for reflationary fiscal policy.

“US elections are rightly gathering a lot of the market attention [and] most derivatives markets are incorporating a significant volatility premium around and even beyond the election date,” SocGen’s Vincent Cassot, Jitesh Kumar, and Gaurav Tiwari wrote, in their latest volatility outlook.

They call the risk of a disputed result “overstated although not null.” In SocGen’s view, “the most attractive option” for investors and traders is “to focus on a modest normalization of the volatility landscape, using VIX options.” For Cassot, Kumar, and Tiwari, an “earlier-than-expected election result could lead to a relief rally in markets and pressure on short-term volatility.”

If you ask Trump, things are going fine. On Wednesday evening, for example, he posted a panoramic picture on Twitter of Air Force One parked in front of an outdoor crowd next to a crane hoisting a giant flag.

As ever, you don’t want to laugh, because the country is in a severe socioeconomic crisis and if things were to go awry next month, an already bad situation could be made immeasurably worse. And yet, visuals like that one elicit almost involuntary chuckles, which double as fatalistic laments for the cheapening of America.

Commenting further on Trump’s chances, Morgan’s Zezas said “it would likely require a game-changing event, a polling error of unprecedented proportion, or possibly both” for the president to win.

Forgive me, but that’s just the kind of sure-footed prognosticating that has many folks (including investors and traders) so nervous.


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5 thoughts on “The Best-Laid Plans Of Traders And Pollsters

  1. Further read is that Treasury rates anything are not going up. If Dems take the Senate and WH, it’s still months for stimulus funds to get into the economy’s veins. Crude might jump immediately, but who cares. A split of WH and Senate is instant stagflation and no hopes for reflation. Regardless of political leanings, Dems taking Senate and WH is better for portfolios looking for reflation juice.

    Too soon to go in on crude, XLE, and XOP.

    And all the homeless people, presumably most having had both jobs and housing nine months ago, now living in parks, just trying ot survive. Still, at least until spring before they can start getting back on their feet if Senate and WH go to Dems. If split, these people are going to have fewer options yet.

  2. I’d be curious to see a ranked-choice version of chart 1 so we could see what all those in the “contested election” bucket see as the next highest risk. As was discussed here and yesterday, the economy is in for a lot of pain if Biden takes the White House and Republicans take the Senate.

    The other thing to note is the Trump winning scenario. Trump is already highly volatile. Do these fund managers foresee Trump becoming less volatile when not facing reelection? I have a hard time believing that those two scenarios would lead to less volatility than a blue wave.

  3. A risk not mentioned: a scorned Trump who scorches the American landscape on the way out the door. Have you ever terminated a true narcissist? It’s not pretty.

    The Cabinet better be ready with the 25th, although Barr may write his game plan.

    1. I would think that McConnell will be getting his taste also…..
      There is one China issue that recognized could blow up in everyones face……

  4. Trump does have some history of accepting defeat. Let us pretend he does care about his legacy. If trash the country so Mitch can win it back again 2/4 years from now is obviously depresionary and taints Trumps legacy would he not push fiscal spending even if he loses election to save his place in history. That requires some thought on his part.
    But yes, assume the worst, hope the best.

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