Election 2024 – Assessing the Odds
By Adam Thurgood on June 20, 2024
The summer of politics is upon us. With the first presidential debate just a week away, we are entering the unpleasant season of attack ads, the barrage of political robo-calls, and of course, the anxiety most feel as we head toward election day.
To say the least, this is a strange election. Both candidates have had personal drama in the courts, with former President Trump and President Biden’s son, Hunter, being convicted of felonies in the past month. Additionally, President Biden (81) and Trump (78) are the oldest nominees in each of their parties’ history. Their combined age of 159 years is a full 20 years more than the combined age of the two presidents that preceded them, despite the fact that President Bush last served roughly 16 years ago, and it has been eight years since President Obama was in office. President Clinton is younger than both candidates and it’s been 24 years since he was in office! Wild!
While nearly every person I speak to has a similar level of angst and frustration about the nominees and general state of political discourse, the fact of the matter is that the population must choose between Biden and Trump come November (unless something without recent precedent happens in the next few weeks), and, at the moment, Trump appears to be the frontrunner.
I follow the betting markets to get a sense of where election odds stand. Today, as can be seen in the chart below, Trump has a commanding lead of 10%. Trump’s odds of victory have increased over the past month, despite his conviction. However, looking at the bottom panel of the chart, which shows Biden’s approval rating falling with his odds of victory over the past few weeks, perhaps the story is more about concerns over Biden than enthusiasm for Trump.
Trump has never played the role of frontrunner in the general election. Hilary Clinton was well ahead in the polls in 2016 and Biden entered November of 2020 with a commanding lead in the betting markets. As you can see in the chart below, once Biden secured the delegates needed to win the nomination in early June of 2020, he commanded a double-digit lead for nearly all of the remaining election season.
This year, Trump is the odds-on favorite to win. Not only does Trump have a 10-point lead in the betting markets, but he’s also leading in almost every swing state he lost in 2020. The latest polls show Trump with a 5-point lead in Arizona, Georgia, and Nevada. In Pennsylvania, Trump has a two-point lead, while only Michigan and Wisconsin appear to be closely contested.
However, if Trump’s victory in 2016 taught us anything, it’s that polls are not foolproof. Therefore, to get a broader read on election odds we need to reference other indicators. Our friends at Strategas Research Partners cued us into an interesting predictor of elections with a great track record. The 12-month change in the Misery index, which is the combined rate of inflation and unemployment, has predicted 14 of the last 15 elections. When the rate of change in the Misery index is positive heading into election day, the incumbent party typically loses, and vice versa. In the second panel of the chart below, the red vertical lines show instances where the incumbent party lost with a positive growth rate in the Misery index. The green lines depict the opposite, a negative growth rate in the Misery index with an incumbent party win. The predictor provided a false reading in 1976 but otherwise has been incredibly accurate.
The Misery index currently sits at 7.3%. If the indicator proves accurate again, Biden can’t see the combined rate of unemployment and inflation rise above 7.5% on election day. Inflation readings have been cooling of late, but leading indicators of inflation are not providing the all-clear. On the unemployment front, momentum appears to be on the upside. Over the long history of the unemployment rate, once the rate breaks above the two-year moving average it typically accelerates much higher. As you can see below, we are now in that zone. While currently signaling a Biden victory, there is risk that the Misery index will end up above the 7.5% level heading into the election, hurting Biden’s odd of success.
One of the best predictors of presidential elections is actually the performance of the S&P 500 between July 31st and October 31st of election years. When the market is up, the incumbent party wins and vice versa. This indicator has successfully predicted every presidential election since 1984 and 17 out of the past 20. Thus, the market’s trend should be closely watched as we move from the summer into fall.
For now, the odds seem to be in Trump’s favor. However, a lot can change in the coming months. Next week’s debate will be the first major potential catalyst. While both candidates have proven to have no problem racking up the national debt, their policies differ greatly when it comes to energy, the border, and geopolitics. Therefore, it is important that we keep our eyes open throughout election season to better understand how to position portfolios.
