Do the markets even care about the US election?

Episode Summary

Executive Summary: The episode examines whether markets truly care about the U.S. presidential election, concluding that reactions are uncertain and often overinterpreted. Katie Martin and Rob Armstrong argue stocks may not have a clear winner, while bonds and the dollar are more likely to react to Trump-inflation expectations and Fed policy. They also discuss the likely 25bp Fed cut, possible post-election volatility, and a humorous Long Short segment on nuclear power, bees, and Peanut the squirrel.

Main Topics: Do markets care about the election? (Priority: 5/5): The hosts argue against treating markets as people with preferences. They say the election’s market impact is ambiguous because different forces point in different directions, and past election reactions were driven by specific policy surprises rather than simple candidate identity. Trump, inflation, and the bond/dollar reaction (Priority: 5/5): A major theme is the market view that Trump would be more inflationary and growth-positive, pushing bond yields higher and strengthening the dollar, especially given existing U.S. rate differentials versus Europe, Japan, and China. Stock market sector winners are unclear (Priority: 4/5): The hosts note that equities, especially broad stocks, do not have an obvious election-based direction. Even tech is mixed: Trump may remove antitrust chief Lina Khan, but Vance’s anti-Silicon Valley posture and Harris’s ties to tech complicate the picture. Investor positioning: neutral institutions vs. Trump-leaning hedge funds (Priority: 4/5): Large long-term investors are portrayed as mostly neutral because no one has an edge, while macro hedge funds appear more heavily positioned for Trump. That creates potential for sharp short-term volatility if the result surprises. When the result becomes known matters to markets (Priority: 4/5): The discussion emphasizes that markets may react positively to merely having a clear outcome, but prolonged uncertainty or a contested result could create frustration and volatility. Trump is expected not to concede easily if he loses. Fed policy and the macro backdrop (Priority: 4/5): The episode shifts to the Federal Reserve, where the hosts expect a 25bp cut and possibly another in December, driven by weak jobs data. They stress how quickly inflation and employment narratives can change. Long Short: nuclear power, bees, and Peanut the squirrel (Priority: 2/5): The lighter second half covers Rob’s conflicting enthusiasm for nuclear power and rare bees after an FT headline about Meta’s AI data center, plus a bizarre social-media/political story about Peanut the squirrel.

Key Arguments: Markets are not a single mind; it is misleading to say "the market" wants one candidate or another. Trump’s 2016 market rally was largely a mechanical response to an unexpected result plus expected corporate tax cuts, not a general rule. The bond market and dollar are the clearest election-sensitive assets because Trump is broadly seen as more inflationary. U.S. rates are already above those in Europe, Japan, and China, so any additional U.S. rate advantage could further lift the dollar. Equities do not have a simple partisan winner; sector effects are mixed and difficult to predict. Big, slow-moving investors are staying neutral because they have no edge, while faster macro funds are more aggressively trading a Trump scenario. A decisive election result could briefly be market-positive simply by removing uncertainty. The Fed is likely to cut 25 basis points, with the possibility of another cut in December if labor data remains weak. The macro narrative around inflation and jobs can flip quickly, so current market assumptions may not last long. Post-election volatility could persist if the result is delayed or contested.

Data Points: US betting market odds: 70% to 35% for Harris (as described by the hosts as distorted/wrong) - Rob says he bet after the odds looked mispriced on a prediction platform. Bank transfer lag: 2 days - Rob notes his money took two days to clear, during which the odds moved significantly. Odds move: About 15% - He says the election odds closed by roughly 15% before his bet was fully in place. Trump victory in 2016: Immediate strong stock rally - Used as historical comparison for why markets may react to surprise outcomes and tax-cut expectations. Corporate tax cut effect: Lower tax → higher earnings per share → higher stock prices - Katie explains the mechanical market logic behind the 2016 rally. US 10-year yield: Used as a proxy for Trump winning - The hosts say the yield rose when Trump odds increased and later eased off. Jobs added in last report: 12,000 - A weak US labor-market number that the hosts say locks in a 25bp Fed cut. Fed rate cut expectation: 25 basis points - The hosts expect the Fed to cut by a quarter-point rather than 50bp. Potential December cut: Likely - They say a second cut in December is probably on the table if data stays soft.

Pivotal Quotes: "anthropomorphism is bad" — Katie Martin: She warns against talking about markets as if they have emotions or preferences. "the market thinks Trump's going to win" — Katie Martin: She summarizes the prevailing interpretation of bond and currency moves ahead of the election. "the only way that could possibly happen is if Kamala concedes" — Rob Armstrong: He argues the election may drag on if Trump refuses to concede after a loss.

Implications: Listeners should expect noisy, uncertain market reactions rather than a clean election trade. Bonds, the dollar, and Fed expectations matter more than stocks, and delayed results could keep volatility elevated for days or weeks.