Monday, November 14, 2016

Howard Marks Memo: Go Figure!

Link to: Go Figure!
Think back to just before last week’s election.  What did we know?
  • The polls were almost unanimous in saying Hillary Clinton would win the popular vote by about 3%.
  • FiveThirtyEight, an analytical website whose forecasts had proved quite accurate in the two prior presidential elections, gave Clinton a 71% probability of winning, and almost everyone else was between 80% and 90%.
  • Clinton was favored in most of the “swing states” that would make the difference in the Electoral College.  Thus she was expected to win more than 290 electoral votes, leaving just 250 or so for Donald Trump.
  • Clinton was the obvious choice of the people who move the markets.  This could be seen in the fact that the markets went up when Clinton’s odds improved in late October (recovering from some unpleasant Wikileaks disclosures), and then they fell after the FBI’s James Comey announced the discovery of an additional cache of Clinton emails on October 28, lifting Trump’s chances.
  • Thus there was a near-universal belief that a Trump victory – as unlikely as it was – would be bad for the markets.
So what happened?  First Clinton didn’t win.  There’s much soul-searching, particularly among the forecasting fraternity.  Everyone knew intellectually that Trump had a non-zero chance of winning, but few people thought it could actually happen. 
And second, the U.S. stock market had its best week since 2014!  The Dow Jones Industrials rose almost 5% for the week, taking them to a new all-time high.  The Dow was up every day last week.  It rose on Monday and Tuesday, when Clinton was expected to win.  And then it rose Wednesday, Thursday and Friday, after she had lost. 
That behavior calls to mind my January memo, “On the Couch,” on the subject of the market’s irrationality.  Clearly, the election was the biggest event last week, so it must have been the main influence behind the changes in stock prices.  But how could the expectation of a Clinton victory make stock prices rise, and then the reality of her defeat make them rise further?