The CIO’s Take:
Big vote looms on Tuesday
After a US presidential election cycle filled with more than its fair share of drama, we’re just a day away from voters hitting the ballot boxes. As such, we can’t help but spend a little time setting our readers up for what we expect should be a highly contentious election day. Indeed, we’re particularly motivated to comment on the candidates’ odds going into Tuesday, given how different the view of each party’s chances is depending on which source one considers. We’ll also have a few words to say about the election outcome and investors’ portfolios.
Trump soared in prediction markets…
So, who’s more likely to win? Our take is that Trump has always had a slight edge, but that it will be an incredibly close contest. That’s what polls are saying now too. Prediction markets, on the other hand—often touted as exploiting the ‘wisdom of crowds’ to predict better than polls—have often painted a different picture. Take Polymarket, for example, a blockchain-based prediction market which, as of Sunday, had logged over $3 billion of bets on the election winner. Last Friday, prices there implied Trump’s win probability was just about 63%.
…But prices and polls can diverge
In fact, since Harris assumed the Democratic nomination in early August, prediction markets have mostly deviated from polling figures, putting a meaningfully higher likelihood on a Trump win than even sophisticated models for aggregating polls and other fundamental information, like Nate Silver’s FiveThirtyEight model. That model (see below) has mostly pegged Harris as the candidate to beat, until her post-nomination polling surge gave way—perhaps predictably—to a very slight lead for Trump.
Interestingly, over the last few days, Polymarket’s price on Trump has corrected massively and, while still giving him a better chance of winning than many polls, seems much more reasonable now than just a few days prior. One read of the discrepancies witnessed above is that prediction markets are simply doing what they do best: cutting through the bias of polls by weighting myriad opinions based on how much money individual observers are willing to risk on their views. If that’s right, then the race has gotten much closer as Election Day nears.
Whales may move markets
On the other hand, those closely watching Polymarket—which, by virtue of its structure exposes the trades and positions of every user making predictions for the public to see—noted that around early October, ‘whales’ with big positions on Trump significantly upped their holdings. In particular, four users’ accounts that had amassed bets of roughly $28 million by late October were revealed by the New York Times to be controlled by a single French trader with deep pockets and a strong opinion about the US election’s outcome.
Manipulation at play, or just bias?
The existence of big bettors slinging millions of dollars on bets that could significantly push prices raises plenty of concerns about the value—and risks—of putting much stock in increasingly popular prediction markets. Some critics of such exchanges have alleged such whales are actually well-funded political operatives seeking to artificially influence perceptions about who’s most likely to win, which could, for example, impact voter turnout. We think it’s more likely a strong prediction market tilt toward Trump reflects a conservative bias in users of crypto-based prediction markets.
It may not really matter for stocks
Aside from settling prediction market bets, does the election’s outcome matter for investors’ portfolios? Analysts at LPL Financial attempted to answer that question earlier this year and came away with a surprising conclusion: If one had invested $100K in the S&P 500 back in 1950, that would have climbed to just over $32 million as of June 2024. Investing only during Republican administrations, the final sum would be a mere $1 million; under only the Dems, the initial sum grew to $3 million. It turns out who wins mattered much less than simply staying invested!
Tesla first out of the gate
Outside of Nvidia, all of the so-called “Magnificent 7” stocks have reported earnings for the most recent quarter, and the results have been… well, you can judge for yourself. First up was Tesla, whose October 23rd earnings were better than expected, with plans for a cheaper model still apparently on track, sending the stock up by over 22% the next day. That said, the jump only erased losses shares had experienced earlier in the month, when the EV maker’s much-hyped “Robotaxi Day” set in Hollywood bombed with investors, and TSLA stock closed down 4.5% for October.
Solid results for Alphabet
Last Tuesday, another tech heavyweight, Alphabet, reported its results, and the company’s top- and bottom-line beats were likewise cheered by investors, who sent shares up close to 3%; better-than-expected revenue in the firm’s search and cloud segments helped assuage concerns—including competition in AI-powered search engines from the likes of OpenAI and Meta, as well as regulators’ contemplation of a breakup of the company—which, similar to Tesla, had pushed the stock off its mid-July record high. At the end of October, shares were still 10.5% below that July.
Microsoft, Meta disappoint
Things got a little gloomier on Wednesday, when Microsoft and Meta reported third-quarter results. Both companies exceeded Wall Street’s estimates, but saw their shares slide as the market registered disappointment with sales forecasts: disappointing guidance for the Azure cloud computing division, in Microsoft’s case, and a lackluster fourth-quarter revenue forecast, on Meta’s part. Investors also seem frustrated at the increasing price tag of investments in AI infrastructure, with both firms telegraphing much more capex on the horizon in earnings calls with analysts.
Amazon rallies, Apple falls
Finally, Apple and Amazon reported on Halloween, with the iPhone maker’s weak sales in China and middling forecast for December-period sales giving investors a scare, leading AAPL shares down by more than 1% on Friday. Amazon’s results meanwhile delivered a treat: solid growth in AWS, retail, and ad sales, sending the stock up by over 6%. Looking through last quarter’s earnings from the Mag 7—a mixed bag, to be sure, on expectations, guidance, and plenty of other factors—it’s easy to forget that this handful of stocks accounts for a huge share of US earnings growth (see below).
And even though high expectations mean that some earnings beats lead to stock price declines, it’s also worth remembering that stocks can ‘climb a wall of worry’ on the way to new highs. Some interesting research by analysts at Bloomberg on the prior quarter’s earnings showed Magnificent 7 stocks dropping 3.3% on average in the immediate aftermath of their Q2 reports, only to gain an average of 4% in trading since then.
November FOMC ahead
Tech companies’ earnings growth is certainly part of what’s powered US stocks to big gains in 2024, but we’ve also been talking for weeks now about a soft landing narrative keeping investors optimistic about equity performance as the Fed starts easing rates. That hopeful scenario got a big boost when nonfarm payrolls data came in a little hotter after the FOMC’s jumbo rate cut in September. Last Thursday, a report from the US Bureau of Economic Analysis (BEA)—one of the last big macro releases before the Fed’s November policy meeting—offered up another perspective.
No bombshells in PCE data
According to the BEA, the Personal Consumption Expenditure (PCE) price index grew by 0.2% month-over-month in September and 2.1% year-over-year. That was in line with analysts’ consensus and, on the face of it, comfortably close to the Fed’s 2% target. Core PCE inflation, by contrast, came in at 0.3% for the month, the biggest monthly increase in core PCE in five months. That put year-over-year core at 2.7% for the third straight month, 0.1% higher than expected. The uptick was driven by services, up 0.3% for the month; goods prices actually decreased by 0.1% in September.
Consumer spending remains robust
For those worried consumer spending might face a reckoning as households’ budgets feel the strain of dwindling savings and now a gradually cooling labor market, there was consolation in personal consumption expenditures, also reported by the BEA, which rose 0.5% in September, better than the upwardly revised 0.3% increase in August, and higher than the 0.4% analysts expected. On an inflation-adjusted basis, the 0.4% rise in spending came in 0.2% greater than August’s tally, driven by healthy spending on both services and goods for the month (see below).
Expect 25-bps cut this week
It’s hard not to be happy with the data summarized here. Sure, it would be nice to see core inflation continuing its march downward toward the Fed’s 2% bogey, but the degree of stickiness we’re witnessing at present won’t likely be enough to stop the Fed from continuing to gradually ease, given its view seems to be current rates are still more than restrictive enough. That’s borne out in CME Group data: As of last Friday, just a week out from the Fed’s November meeting, the market was pricing in over 98% chance of a 25-bps cut, and an 83% probability of two cuts before year-end.
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