If you read Chief Market Strategist Ryan Detrick’s prescient blog on Wednesday, you knew this might be coming. Ryan reminded us that debates don’t usually have an impact on elections, but sometimes there is that one gaff or glaring fault that a candidate never fully recovers from. Last night former President Donald Trump did not so much win the debate as President Joe Biden definitively lost it. In my opinion, despite a week of intensive preparation, Biden failed miserably in the one place where he absolutely had to succeed: convincing swing voters that age-related decline did not disqualify him from occupying the highest office in the land.
The resulting vote swing from a debate gaffe is small. But with a nearly evenly divided electorate and a small polling deficit for Biden in the most important swing states, even a small carryover from the debate could change the election.
I was watching prediction markets as the evening proceeded last night to gauge public reaction in real time. Take these numbers with a grain of salt. Prediction markets are often more a reflection of sentiment than they are predictive, but they give us a good ballpark estimate of shifting odds. Over the course of the evening, the likelihood of Biden being the Democratic nominee in November fell from an implied 86% to 61% on PredictIt and from 91% to 67% on Polymarket.
Those are big moves, but let’s be careful about what it means. To the degree that it’s accurate, Biden is still more likely the Democratic nominee than not. He has the necessary delegates by an overwhelming margin so he can’t be pushed out. He has to bow out. And he’s well known to be doggedly persistent in pursing his goals—it’s been part of the secret of his success. But there will be mounting pressure for him to drop out.
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Trump’s prospects of winning the election did not correspondingly rise much. On PredictIt, it only rose from 55% to 58% and on Polymarket from 61% to 64%. In the RealClearPolitics betting market average, which includes actual oddsmakers as well as the prediction markets, he rose from a 51% favorite to win the election to 55%. Even these swings can be meaningful if they stick, but they are only a small change, roughly the equivalent of going from a 2-point favorite to a 2½-point favorite in a football game.
Why such a small swing? Even if Biden is now perceived to be a weaker candidate, if he does give up the nomination whoever replaces him will likely be a stronger candidate than he was before the debate. The new candidate would likely have a similar overall profile as Biden without the added baggage of age-related concerns. The main contenders right now are California governor Gavin Newsom and Vice President Kamala Harris with a lot of other names in the field.
There is another important prediction market out there that’s even more important to us as investors—the financial markets. S&P 500 futures spiked a small but meaningful 0.12% during the debate. Futures for the Russell 2000 Index of US small cap stocks moved a similar amount during the debate, but unlike the S&P 500 have continued to climb overnight. Meanwhile, the 10-year Treasury yield initially climbed 3 basis points during the debate but has since given some of it back.
We rarely get such a direct market reaction to an election event in real time. What does it tell us? Assuming the markets are directly reacting to the marginally increased likelihood of a Trump victory, a reasonable takeaway is markets believe tax cuts (deficits) and deregulation are stimulative near term, especially for small caps, but there is some inflationary risk from deficit-financed spending, tariffs, and the tighter labor market that comes with a highly restrictive immigration policy. It also tells us that markets had some concerns about Biden, although we don’t know if that’s because of policy or his capacity to lead.
For those fascinated by political theater, there’s more to come as post-debate Democratic hand wringing is channeled into actual political pressure on Biden to drop out, but this will mostly take place behind the scenes. Additional pressure will come if the Biden campaign begins to face new fundraising challenges. As for Trump, he loves a good spectacle and knows how to exploit it, but it’s also important to remember that the post-debate response to his usual bluster and hyperbole was not well received by swing voters, even if his base loves it. He did not win the debate last night as much as Biden lost it, giving what will likely be remembered as the worst performance in the history of televised presidential debates.
For more content by Barry Gilbert, VP, Asset Allocation Strategist click here.
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