U.S. Government Instability Risk Forecast – GeoQuant

GeoQuant U.S. election data

U.S. Government Instability Risk — GeoQuant’s primary indicator of U.S. election outcomes, derived from a cross-country model of incumbent survival — continues to hover near its historical high, having run consistently above trend for (at least) the past year. To wit, the dashed line below represents GeoQuant’s U.S. Government Instability Risk forecast from one year ago, while the solid line represents the realized level of risk through last Friday 9 May 2020.

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Q1 2020 hedge fund letters, conferences and more

Government Instability Risk

U.S. Government Instability Risk forecast to decline based on trend reversion--but current risk has run far higher than trend:

Government Instability Risk

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InvestorsDuring the bull market, small caps haven't been performing well, but some believe that could be about to change. Breach Inlet Founder and Portfolio Manager Chris Colvin and Gradient Investments President Michael Binger both expect small caps to take off. Q1 2020 hedge fund letters, conferences and more However, not everyone is convinced. BTIG strategist Read More

In order to incorporate the impacts of the Covid-19 pandemic more directly into our election forecast, below we present a revised model of U.S. Government Instability Risk derived explicitly from our custom Covid-19 Political Risk model. Recall that this model overweights political and social factors especially relevant to Covid-19 country risks and resilience, including of course Health Risk along with State Capacity Risk, Social Polarization Risk, and the like. The resulting measure of “Covid-19” U.S. Instability Risk is represented below by the solid trend line, with our default model marked by the dashed line for comparison. Note that the Covid-19 health shock effectively generates a step change increase in risk, noted here as becoming material on 21 Jan 2020, the day the first case of Covid-19 was reported in the U.S.

The Imapct Of Covid-19

Covid-19 represents a steep change increase in U.S. Government Instability Risk:

Government Instability Risk

GeoQuant sees further evidence for a Trump loss by returning to their default model and focusing on U.S. Institutional Support Risk, a key component of Government Instability Risk which measure of incumbent support from/control over major political institutions. In addition to overall Instability Risk, GeoQuant has long flagged Institutional Support Risk as the most important U.S. election sub-indicator to watch going forward.

U.S. Institutional Support Risk

Recent trends in U.S. Institutional Support Risk suggests Trump will lose:

GeoQuant U.S. election data

The unique political and social conditions of this year also suggest that election-related political risk will have a more negative relationship with U.S. equity markets in 2020 than it has in the recent past.

Below GeoQuant summarizes a simple analysis of both U.S. Instability Risk and our overall measure of U.S. Political Risk against the S&P 500:

GeoQuant U.S. election data