Reflections on the election
On Election Day, I was with some colleagues for a work-related dinner at the Napa Valley Grille in Westwood, CA. We had a private room that also happened to have a flat-screen TV, which was, not surprisingly, tuned to election coverage. It was still early in the evening on the West Coast, but the polls in several eastern states were already starting to close.
As the early returns started to come in, I felt a familiar pit in my stomach – one I hadn’t felt since the night of the Brexit vote. Not only did the popular vote totals in many of the key swing states seem to favor Donald Trump, but the margins in several of the critical states that composed Hillary Clinton’s “firewall” were shockingly close. After checking the futures market on my phone and seeing the S&P 500 in freefall, I excused myself from the dinner to begin what would be a very, very long night.
On the way back to my hotel, I began to obsess over how we could have gotten it so wrong…again.
Following the surprise outcome of the Brexit vote back in June, pollsters, pundits, and market participants all vowed to learn from the mistakes made during that process. Polls would now be assessed with a more critical eye, trends in betting markets would be viewed with greater skepticism, and cutting-edge technologies such as artificial intelligence and social physics would be leveraged more effectively. While we were all a bit less confident in our ability to forecast political outcomes, we felt that these lessons would help improve our forecasting ability for the US election.
Yet we still fell short of the mark. So what are the new lessons that we can learn from the US election?
Political outcomes are still inherently difficult to forecast
It’s important to note that, broadly speaking, polls did their job, accurately predicting a slight Clinton advantage in the popular vote. But the final weeks of polling exhibited extreme volatility, making it impossible to assess the size of this advantage. And in the case of the US election – with its complex system of turnout dynamics and Electoral College math amplifying certain local changes more than others – the size of the margin matters. For Clinton, a higher tide would have raised all ships, and the relatively small surprises would not have been definitive.
Ultimately, President-elect Trump’s success came down to his appeal to blue-collar workers in a handful of key states that represented only a fraction of the national popular vote. Absent an absurdly extensive polling apparatus, this level of detail will continue to elude forecasting models, no matter how sophisticated.
Emergent political trends have been underappreciated…
The rise of populism and anti-establishmentarianism has been difficult to gauge. While many forecasts acknowledged that the data showed a tight race, most qualitative analyses assumed that the Democrats’ vaunted “ground game advantage” would skew turnout in their favor. Instead, turnout among African Americans and Millennials was weaker than their record Obama years, and Clinton failed to build a big enough margin among college-educated, suburban women. Meanwhile, Trump’s “drain the swamp” message successfully energized a higher turnout from white, working-class voters in rural areas.
…and their effects are still unclear
With expectations of a Clinton win, equity futures prices on the S&P 500 initially gapped lower by the maximum-allowed 5% in the aftermath of the surprise outcome. But once the exchanges opened, stocks quickly found consolation in the GOP’s pro-growth policy approaches and in the realization that, as with Brexit, the implications aren’t as binary as they seemed.
Implementation will be key
Nonetheless, there is still a lot of uncertainty. We will be closely watching for signs of how Trump’s rhetorical flourishes will translate into policy reality.
The first signs will come from cabinet appointments and Trump’s relationship with GOP congressional leadership. His likely regulatory policy will provide relief to sectors such as healthcare, financials, and energy – fully one-third of the S&P 500 by market value. The details of Trump’s tax and spending plans will be vital for the growth and inflation outlook.
Negative trade and immigration scenarios remain possible. Trump’s impulsive style and protectionist rhetoric increase the chance of negative headlines, and volatility is likely to flare periodically.
Our advice is to stay the course with a well-structured portfolio, and don’t overreact to market swings.
Attractive fundamentals will continue to outweigh political uncertainty, and there is a good chance that fiscal stimulus could serve as an additional tailwind… and that some of candidate Trump’s more extreme policy stances will be softened by President Trump.
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