Election Update

Last week, I predicted President Trump would win reelection with 316 Electoral votes and showed a couple of ways to bet on that via PredictIt. I also showed a way investors could hedge against the risk associated with a contested election. Let’s look at what I got wrong, what I got right, and the market reaction.

What We PredictedHedge Election Risk

Roadmaps to victory via BBC News

The Cook Political Report’s Demographic Swingometer let you predict the election outcome based on the votes and turnout percentages for five different demographic groups. Its default looks like this.

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Biden v Trump

My main change was to raise Trump’s share of their respective votes to 12% and 35%, respectively, which generated this:

Biden v Trump

I made a couple of additional assumptions to get my 312-226 electoral vote estimate, but the difference between Trump getting 306 electoral votes and 312 was immaterial to my election bet.

What Happened

As of election night, my electoral vote prediction for Trump appeared too low. I considered selling my PredictIt contract betting on him winning with a 60-99 electoral vote margin and buying the next highest one. However, it was difficult to access PredictIt’s site on election night. By the next morning, Trump had been overtaken by Biden and Trump’s shares had crashed on the betting markets.

What We Got Right

Trump did make gains with Hispanic and black voters. He earned a higher share of nonwhite voters than any Republican candidate since 1960. Trump’s share of both Hispanic and black voters were about what I had guessed: 35% and 12%, respectively.

We also were right about Trump voters’ enthusiasm. The President has nearly 70 million votes so far – about 10% more than he won in 2016. His coattails led to unexpected gains for Republicans in the House of Representatives.

What We Got Wrong

What we got wrong was voters’ apparent enthusiasm for Vice President Biden. Despite his sparsely-attended campaign events, Biden has received nearly 75 million votes so far. That’s more votes than Obama won. It’s the most votes won by any Presidential candidate ever (Oddly, though, Biden seemed to have no coattails, with Democrats set to loose ten or more seats in the House). As a result, Biden is currently favored to win the presidency. The Washington Post reported Biden may declare himself the winner as soon as Friday. President Trump has vowed to contest the outcome of the election though, citing reports of possible voter fraud in several states.

Hedge Against The Risk Associated With A Contested Election: The Market Reaction

In my election prediction post, I included this video showing how to hedge market risk in the event of a contested election.

That video mentioned this New York Times article which professional investors’ fears about a contested election. We got a contested election, and it drove the market higher. What’s going on?

Hedge election risk
Data by YCharts

The simplest explanation is that investors are betting that Biden will win the presidential election and Republicans will keep the Senate. That would lead to gridlock and prevent radical policy changes.

What Now: Hedge Election Risk

If you have been on the sidelines due to election uncertainty and are looking to put some money to work now, below are our current top ten names, as of Thursday’s close.

Hedge election risk

Those are the securities Portfolio Armor estimates have the highest return potential over the next six months, net of hedging cost. It estimates returns by analyzing past returns as well as forward-looking options market sentiment. Because each of those names is hedgeable, you may want to consider adding cost-effective protection if you buy some of them.