What goes into a forecast?
There are an endless number of specific components—all the propeller-head stuff: valuation analysis, assessing macro-economic data, etc.—but in broad terms it comes down to three simple things.
The first is determining prevailing market sentiment. Every forecast is really just a trip to the horse track, so the first step is to establish how fast everyone else thinks a particular horse will run—the stated odds. This year’s US election may be the greatest (and most disturbing) horse race of all-time.
As a portfolio manager I normally would largely ignore the US presidential election, but as we all know, this election is different. For the first time ever, I have had to at least consider repositioning portfolios based on the likelihood of a Republican victory. However, we haven’t adjusted our client’s portfolios once in response to Trump’s rampaging presidential campaign. My first task was (and is) to determine the market odds of Trump winning.
While odds have varied, Trump has consistently been a long-shot. Following last week’s infamous Access Hollywood–bus video with Billy Bush—or “Bushy” as he apparently likes to be known to the ladies—Trump’s odds of winning now sit well below 15%. The Chicago Cubs, which have been blanked since 1908, currently have an almost 3x greater chance of winning the World Series.
Once I know the posted odds, I then have to overlay my own opinion of which horse I think will win. I know that Hillary Clinton has had some horrendous stretches during this campaign including last month when she called Trump supporters “deplorables” and almost took a header onto a New York City sidewalk. This was really, really bad, but notably, she didn’t relinquish her lead in the polls. Further, what I’ve always been able to take for granted is Trump’s incredible lack of discipline and propensity for self-sabotage. There’s no shortage of examples, but attacking a Gold Star family in August and more recently conducting a 3 am Twitter war against a former Miss Universe and then directing his followers to view a sex tape are amongst the best. And the Access Hollywood–bus video is the finest—if that’s the right word—example of all.
If he does happen to gain ground prior to Election Day (God appearing from the skies personally commanding Democrats to vote Trump?), I have confidence that the momentum will be short-lived. At this point, I have a high degree of confidence that the betting odds and polls will be correct. In fact, I believe Clinton’s chances of winning may be even better than indicated because of the potential for a higher-than-normal turnout from minority voters. In other words, I see no reason to reposition our client portfolios ahead of the US election results.
But what about Brexit, Dewey defeats Truman, and so on? Yes, there’s risk of the unexpected, but what little I do know about US politics is that the president has to share power and work with Congress in order to have his or her policies supported. Trump doesn’t work well with anyone, hence the current GOP civil war and massive turnover within his own campaign leadership, and there are enough moderate Republicans that even if Trump was to win, he would likely have difficulty enacting policies that would truly damage the US economy.
A miraculous victory might create temporary volatility, but doing long-term economic damage would be an even tougher challenge for him. We also run a balanced portfolio for our clients, so this is what the bonds are for: to weather the unexpected short-term storms. Longer term, if we were to start to see actual shifts in the US economy then we’d adjust client portfolios accordingly, but we can’t make changes based on the damage Trump might inflict, particularly as he has little chance of even being elected. Now granted a Trump win would give him access to the nuclear launch codes, but if he forgoes a nasty late-night tweet and instead launches nukes, no portfolio in the world is going to save you.
Finally, what’s the third ingredient involved in forecasting? Luck. I have to hope that Hillary takes her antibiotics and that there aren’t more incriminating emails leaked from “400-pound” hackers. However, I’m confident that luck is on my side. And I’m willing to bet there are more damaging Trump videos to come, so our clients probably won’t actually need their bonds, just their vomit bags.