Conventional wisdom says Donald Trump doesn’t stand a chance against Hillary Clinton in a general election and as Clinton stands for the status quo we should just relax and not worry about the US election. Conventional wisdom is right more often than contrarians like to admit, but the probability betting markets assign to a Trump presidency is worryingly similar to the odds of Brexit a few months before the vote. To me, regardless of who wins the election, Trump risk is a prime candidate for replacing Brexit risk as a market theme later this year.
More likely than you think
Betting markets give Trump a one-in-three chance of winning and many pundits and investors see the odds as much lower than that. After all, in his efforts to appeal to the Republican base he has taken extreme positions which have alienated too many parts of the electorate to be successful in November’s general election. Mitt Romney is widely seen to have lost the 2012 election due to a lack of support from minorities and after the past few months it is difficult to see how Donald Trump could improve on Romney’s numbers with Hispanic and Asian Americans, revert to pre-Obama support levels with African Americans or improve on Romney’s vote share with women. Throwing into the mix the lukewarm backing by significant parts of the Republican party and his oft-declared dismissal of the data-driven campaign methods that helped Obama secure two victories, the ‘conventional wisdom case’ sounds reassuringly solid and is a sensible base case.
Unfortunately, conventional wisdom doesn’t exactly have an impressive track record on Trump. So let’s ask the question: How could Trump win? First off, his favourability ratings may be at record breaking negative levels, but Hillary Clinton’s aren’t much better, so it’s possible they cancel each other out as a factor in deciding who to vote for (see below).
It is also possible that Trump can turn out white male voters, where he has a large lead in the polls, in historic numbers to offset his poor polling with minorities and women. The white male share of the vote may have steadily declined from 45% in the early 1980s to 35% today, but they are still the largest single block of voters. This is a stretch, but given Trump’s success in turning out previously unengaged white male voters in the Republican primaries, it is not impossible.
Then there’s event risk. An economic downturn is not impossible and tends to weigh on the incumbent party, in this case Clinton. A terrorist attack could have a similar impact. While it’s not a given that this would boost Trump’s chances, the precedents of the Paris and Brussels attacks show he has been very skilful at turning such events into increased support by taking a hard-line stance (e.g. Muslim ban) and his betting odds jumped again after the Orlando terror attack.
I could easily add further to the list, but the point is that while winning the Presidency will be an uphill climb for Donald Trump, it’s more likely than many think and too likely to ignore. And the experience from the Scottish and EU referendums is clear: a significant shift in probabilities of a political event can be enough to move markets. See Part II for the potential market implications.