Financials, industrials and materials sectors are the most consistent Trump trades.
The S&P 500
SPX 1.08% has gone down when Donald Trump’s chances of winning the 2024 election have gone up, and up when they have gone down.
Traders in stocks need to know this because the political scene in the U.S. is changing so quickly, especially now that Joe Biden has dropped out of the race for president. A lot of traders make decisions about their portfolios based on their political views instead of an objective analysis of the facts.
For this column, I looked at how the weekly changes in the S&P 500 and the PredictIt.org contract related to Trump’s chances of winning the November election correlated with each other.
In the last 18 months, the S&P 500 fell an average of 10 basis points (0.10%) in the weeks when that contract’s price went up. This is equal to a loss of 5.0% per year.
When the price of the Trump contract went down, on the other hand, the S&P 500 went up by an average of 72 basis points (0.72%), or 45.4% per year. Because the PredictIt Trump contract trades 24 hours a day, it’s hard to compare its daily changes to those of the S&P 500. That’s why I looked at changes that happen once a week.
It’s important to be careful about how you interpret this result for two reasons:
The level is almost as high as the 95% level that statisticians use to tell if a pattern is real, but not quite. (For those who are keeping track, the 92% level was important.)
Connection does not mean cause. The stock market may be going down for some other reason when the price of the Trump contract goes up. For instance, the stock market hates uncertainty, and the idea of a Trump presidency makes economic and monetary uncertainty much worse. This has nothing to do with whether Wall Street wants President Biden's economic and monetary policies to stay in place or not.Even so, the inverse correlation that showed up is interesting because it goes against the story that some groups are telling, which is that Wall Street is excited about a Trump presidency. That story doesn’t match up with what the numbers say.
The most damage is done to these three S&P 500 sectors
I did the same analysis again with each of the Sector SPDR ETFs that track the 11 S&P 500 sectors. There was only one sector whose average price went up during the weeks when the Trump contract went up. That sector was utilities. But this correlation wasn’t really statistically important.
Most of the time, the prices of the other 10 sectors went down during the weeks that the Trump contract went up. To be statistically significant at the 90% level, the inverse correlations were only found in three sectors: materials, financials, and industrials.
