election Archives - Servant Financial

Polymarket Predictions and Policy Perturbations

Written November 4, 2024 by John Heneghan

With less than 30 days remaining before the 2024 Presidential and other elections on November 5th, investors’ eyes are focused on the electoral outcomes and the potential market impacts.

The Presidential race remains very tight between Vice President, Kamela Harris, and former President, Donald Trump. It appears that the path to the White House will hinge on just seven key swing states: Nevada, Arizona, Michigan, North Carolina, Wisconsin, Georgia, and critically important Pennsylvania with its 19 electoral votes. Current trends and polls suggest the path to 270 electoral votes will be difficult for either candidate without securing Pennsylvania. Perhaps we now know why it’s called the Keystone State.

We begin by introducing subscribers to Polymarket for an alternative perspective on the electoral college and what we the people are collectively thinking. Polymarket is the world’s largest prediction market. It provides registered traders the opportunity to profit from their beliefs and insights by betting on the outcome of future events across various topics such as politics, sports, and pop culture. Polymarkets reflect accurate, unbiased, real-time probabilities for significant global events. Note, however, Polymarket is unavailable to U.S. residents of the United States because it has not obtained appropriate license(s) from the Commodity Futures Trading Commission.

According to Polymarket, research shows prediction markets are often more accurate than polls or pundits. Polymarket traders aggregate news, polls, and expert opinions, making informed trades with the expectation of profit. Traders’ economic incentives ensure market prices adjust to reflect “true” odds. Polymarkets always seek the truth (Latin: “semper veritas”). According to Polymarket, this makes prediction markets one of the best sources of real-time event probabilities.

So, without further ado, we present the Polymarket U.S. Presidential election market predictions as of 8:30 am on Thursday, October 10, 2024, below:

Source: Polymarket https://polymarket.com/event/presidential-election-winner-2024?tid=1728566107442

Note that there is $1.6 billion of volume on this particular polymarket. The market rules provide “This market will resolve to “Yes” if Donald J. Trump wins the 2024 US Presidential Election. Otherwise, this market will resolve to “No.” The resolution source for this market is the Associated Press, Fox News, and NBC. This market will resolve once all three sources call the race for the same candidate. If all three sources haven’t called the race for the same candidate by the inauguration date (January 20, 2025) this market will resolve based on who is inaugurated.”

Let’s now look at the potential market perturbation each candidate’s policies may have on equity markets. In the long run, there is little evidence suggesting that the political party elected has a directional influence on broad markets. U.S. Bank investment strategists examined market data over the past 75 years and concluded that financial market performance in the medium to long term is minimally impacted by election outcomes. The big drivers of financial market performance remain inflation indicators and broad economic trends.

In the short run, however, specific sectors can benefit based on who is in office and their policies in place. Once again we find that Goldman Sachs is doing “God’s work” and has developed proprietary equity portfolio baskets for each candidate with a Democratic victory basket and a Republican victory basket. Given their proprietary nature, the equity basket securities are not broadly available publicly, but various market participants have provided a general overview of sector preferences and hypothetical stock picks that might be influenced by the policies favored by each party. Please note that we are simply citing conjecture with the foregoing individual stock and ETFs cited. We have conducted limited research and these securities absolutely do not represent recommendations:

Democratic Victory Basket:

Renewable Energy: Solar, wind, and other green technology companies, like First Solar Inc (ticker: FSLR) or iShares Global Clean Energy ETF (ticker: ICLN), due to anticipated continued emphasis on environmental regulations and the funding of “community-based climate projects.”
Healthcare: Companies that might benefit from healthcare reform or expansion, like those involved in Medicaid programs, such as a large managed care organizations (MCOs) like Elevance Health (ticker: ELV) or iShares U.S. Healthcare Providers ETF (ticker: IHF), or health technology leaders, like Boston Scientific (ticker: BSX) or iShares U.S. Medical Devices ETF (ticker: IHI).
Technology: While tech is often considered bipartisan, Democrats might push for more tech regulation on “misinformation or disinformation” while at the same time supporting innovation in certain tech subsectors, especially those linked with green tech or social platforms with obedient, progressive companies, like Meta Platforms, Inc. (ticker: META).
Consumer Discretionary: Companies that might benefit from policies aimed at increasing minimum wages or enhancing consumer protections. This basket might potentially include companies like Target (ticker: TGT) or other companies with strong ESG (Environmental, Social, and Governance) practices such as those represented in the iShares ESG Aware MSCI USA ETF (ticker: ESGU). ESGU represents a potential Democratic trifecta basket in and of itself with 34% allocation to technology, 16% to consumer businesses, and 12% to healthcare.
Education: Companies related to education technology or services, like Coursera, Inc. (ticker: COUR) might also see benefits due to potential increases in educational spending.
Infrastructure with a focus on Sustainability: Companies that work on modern infrastructure, including smart cities, electric vehicle infrastructure, etc. Such companies may be found in the First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index ETF (ticker: GRID)

Republican Victory Basket:

Financials: Banks and financial institutions often benefit from deregulation, which tends to be a Republican policy initiative. Companies like JPMorgan Chase & Co (ticker: JPM) or The Financial Select Sector SPDR Fund (ticker: XLF) could be included.
Energy: Traditional energy and fossil fuel sectors, like oil and gas companies, might be favored due to lower emphasis on environmental regulations with a “drill baby drill” mindset. Think of companies like ExxonMobil Corporation (ticker: XOM) and The Energy Select Sector SPDR Fund (ticker: XLE).
Defense: Although the world was mostly a peaceful place under the 45^thS. President, increased defense spending has historically been associated with Republican administrations. Lockheed Martin (ticker: LMT) or Invesco Aerospace & Defense ETF (ticker: PPA) could be examples. (Personally, I would fade the defense sector as an area of potential focus under Elon’s Government Efficiency Commission since it has the greatest potential for taxpayer savings.)
Industrials and Materials: With policies often focusing on infrastructure or domestic production, companies in these sectors might benefit. Freeport-McMoRan Inc. (ticker: FCX) or SPDR S&P North American Natural Resources ETF (ticker: NANR) may be included.
Pharmaceuticals: Less focus on regulating drug prices could be seen as positive for big pharma. Consider companies like Eli Lilly and Company (ticker: LLY) and The Health Care Select Sector SPDR Fund (ticker: XLV). (Personally, I think of this sector as an area of risk given Robert Kennedy, Jr. grand alliance with Trump and his focus on Making America Healthy Again.)
Bitcoin/Crypto: Trump is expected to lay out “a plan to ensure the United States will be the crypto capital of the planet.” Consider Fidelity Wise Origin Bitcoin Fund (ticker: FBTC) and Fidelity Crypto Industry and Digital Payments ETF (ticker: FDIG) which includes Coinbase Global, Inc. (ticker: COIN) and several bitcoin miners.

Please note that Goldman Sachs also offered proprietary short baskets for each party, but we have only summarized Goldman’s longs.

Whether or not you accept the “veritas” of Polymarket, you may be interested in another good exchange of real-time event probabilities with the handicapping being done by capital market investors. The graphic below presents the relative performance of Goldman’s Victory Baskets through October 9, 2024:

Source: Zero Hedge https://x.com/zerohedge/status/1844168635000160748

As the chart above depicts, markets are constantly re-handicapping probabilistic outcomes. There is still plenty of race left in this two-horse contest as we come around the bend into the home stretch. Voter turnout will be critically important, particularly turnout among young voters. This cohort has typically left political decisions more in the reins of their elders and has historically demonstrated lower participation rates. Since 1988, voter turnout amongst those aged 18 to 29 years has averaged 42%, compared to 56% for those aged 30 to 44, 66% for those aged 45 to 59 years, and a 69% voter turnout for those 60 years and older. As the pundits are wont to say, veritas is stranger than fiction. We’ll all just have to see what happens.

“This is the chief thing: be not perturbed, for all things are

according to the nature of the universal.”

~ Marcus Aurelius

The Next Big Thing

Written December 29, 2023December 29, 2023 by Ailie Carlene Elmore , John Heneghan

As humans, we are constantly looking towards “the next big thing.” Children look forward to Christmas Day when they find presents under the tree. College students look forward to the end of the semester and being one step closer to closing the door on homework and exams. Adults constantly think about the next big life event such as buying homes, marriage, starting a family, retirement, or just trying to make it to the weekend after a long workweek. The human nature of “the next big thing” has created the yearly phenomenon of the New Year’s resolution.

Have you ever wondered where this tradition started? Why did we become so caught up with big or important goals or accomplishments of “next year I am finally going to get in shape” or “this is the year will be the year I finally start my own business”? The tradition is said to have begun 4,000 years ago with the ancient Babylonians. People would hold massive celebrations to honor the new year which began in March when crops were planted, and new life would begin to grow. Oftentimes this would be the time that the Babylonians would crown a new king which is an interesting analogy as we head into election year 2024 in the United States. Likewise, Ancient Romans believed in a similar practice and that their god Janus (how January got its name) would look backward to the previous year and make predictions about “big things” in the coming year.

Thousands of years later, we follow a similar practice of looking at our biggest accomplishments of the past year and setting new bigger, or higher goals for the coming year. In last month’s article, we evaluated the ups and downs of the U.S. economy by addressing interest rates, recession concerns, consumer spending, geopolitical issues, and bitcoin adoption among others. Looking at 2024, we see some New Year’s resolutions on the brink for the U.S. but not your typical “I want to lose 10 pounds” or “I want to finally get out of debt,” even though the U.S. government should definitely work on that second one. We expect some New Year’s resolutions within the U.S. regarding economic stability during election year madness and the public likely has some resolutions about the growing credit card burden in light of rising inflation and interest rates post-COVID-19 pandemic. We also expect a few big companies to have an IPO on their New Year resolution list and investors will be keeping a watchful high to see if they can hit these goals.

We Need to Keep the Economy Calm During the Election Year Madness

High on the New Year’s wish list for 2024 for many in the United States is to maintain a relatively stable economy during what is sure to be a volatile election year with more ballot histrionics and chicanery. Regardless of political beliefs, it is easy to see that polarization between political parties is paramount, which may only breed volatility in the economy and financial markets. People typically keep a watchful eye on the factors driving the economy during elections as sometimes changes in power or just the thought of a change in power can create uncertainty or confidence that shifts the trajectory of the economy one way other the other.

U.S. Bank recently published an analysis examining how elections have historically affected the U.S. stock market. Their analysis showed that while election years can bring added volatility to the market, there was no evidence suggesting a meaningful long-term impact on the market. U.S. Bank showed in the figure below how political party control has historically impacted the value of the S&P500 specifically during the first 3 months following an election.

However, individual sectors can swing more widely than overall markets depending on the key campaign issues during an election year such as energy, infrastructure, defense, health care, and trade or tax policy. Key issues going into the 2024 race are likely to be inflation, climate change, foreign policy, student loan forgiveness, and reproductive rights. U.S. Bank also concluded that the individual drivers such as economic growth, interest rates, and inflation are still the most critical factors for investors to consider. Each political candidate is likely considering these market-moving factors as they position their “big things” for their 2024 election runs.

This Year I Want to Get Out of Credit Card Debt

Those plastic shiny cards in Americans’ pockets may be seeing a little less action in the coming year. Credit card debt levels reached an all-time high of over $1 trillion in 2023 as consumers resort to spending on credit to maintain their standard of living in the face of the rising costs of almost everything. Interestingly, Statista reported in a recent survey that people’s #1 priority going into 2024 was saving more which means swiping less. The average unpaid debt among consumers is around $7,000 and the double-digit interest rate accruals on those debt levels do not bode well for consumer saving or spending.

Source: Statista

While the Federal Reserve is celebrating inflation heading towards its 2% target, some people forget that the inflation number is a year-over-year metric. This fact means while year-over-year inflation numbers have come down, they are being compared to high single-digit inflation numbers from the previous year. Let’s look at the specific costs of a few items. A loaf of bread in March 2020 just before the pandemic began was around $1.37 and a gallon of milk was $3.25 according to the U.S. Bureau of Labor Statistics. Currently, the price of bread is $2.00 per loaf and the price of a gallon of milk is $4.00 meaning there have been “big time” increases of 46% and 23%, respectively, in the price of these staples in just 3 years. On the other hand, the median household income in the United States has only grown around 9% since 2020 suggesting that wage increases have not kept up with consumer price inflation. That’s a “big deal” and this mounting credit card debt and higher interest rates will make it very difficult for most consumers to dig out the debt hole that has been created. Applying the first “big rule” of getting out of the hole is to stop digging, many consumers will cut up their credit cards and pursue more frugal lifestyles.

This is the Year We Go Public

In 2023, there were the fewest number of IPOs in recent history with only 153 companies going public compared to 181 in 2022 and 1,035 in 2021. Some of the biggest IPOs for 2023 were AI chipmaker Arm Holdings PLC [NASDAQ: ARM], which IPO’d on September 14 at a $54.5 billion valuation. The next biggest was Kenvue [NYSE: KVUE], Johnson & Johnson’s spinoff of its consumer healthcare division (Band-Aid, Tylenol, etc.) which IPO’d on May 4, at a valuation of $41 billion. In third place was the popular shoe brand, Birkenstock [NYSE: BIRK], IPO’d on October 11, at a valuation of $7.5 billion.

Looking ahead, 2024 is shaping up to be a “big year” for the IPO market. Topping the list of “next big thing” is Stripe, an Irish e-commerce company valued at $50 billion as the most valuable privately held “technology” concern in the world. Batting second is AI company, Databricks, planning to go public with at a $43 billion valuation. Next in line is the popular social media service, Reddit, planning to go public with at a $15 billion monetization of its more than 50 million daily users.

Buzz due to a recent report from Bloomberg has also ensued around a possible public offering for Elon Musk’s Starlink which provides satellite internet to users around the world. The service has brought high-speed internet to people in even the most remote areas of the country to connect electronically with the rest of the world. Musk released a statement in November saying that Starlink had achieved break-even cash flow but denied reports that the company would be spun out separately from Space X and go public in 2024. Space X, including the Starlink satellite business, is truly the “next big thing.” Space X’s 2023 market share of global satellite launches is estimated at 80% and it has an estimated valuation of $150 billion. While Musk seems to have already “hit the moon” with SpaceX, some are wondering what he will do next and if a Starlink IPO will be the next chain in his legacy.

Bitcoin Spot ETF Approval

Speaking of “big launches”, Reuters reported that up to seven applicants for a spot Bitcoin exchange-traded fund (ETF) only have a few days to finalize their filings to meet a looming deadline set by the United States Securities and Exchange Commission (SEC). The SEC has set a deadline for spot Bitcoin ETF applicants to file final S-1 amendments by Dec. 29, 2023. The SEC reportedly told applicants in meetings that it will only approve “cash only” redemptions of ETF shares and will disallow in-kind redemption of ETF shares. Further, the SEC also reportedly wants Bitcoin ETF filers to name the authorized participants (AP) in their filings. APs are effectively market makers and risk takers in the creation and redemption of ETF shares. APs acquire the underlying bitcoin that backs the ETF shares created and, likewise, sell the underlying bitcoin for ETF share redemptions. Any issuer that doesn’t meet the Dec. 29 deadline will not be part of a first wave of potential spot Bitcoin ETF approvals in early January.

The SEC approval of one or more bitcoin spot ETFs is expected to markedly increase institutional and retail investor demand for bitcoin as well as accelerate the bitcoin adoption curve. Bitcoin experts predict this will result in much higher prices for Bitcoin over time.

Bitcoin is currently trading at $42k and has been by far the leading asset class for 2023 with a 154% year-to-date return.

Our New Year’s Resolution

As we sing Auld Lang Syne into the New Year, we at Servant Financial remain committed to maintaining broadly diversified global investment portfolios tailored for each client’s risk tolerance and station in life. Further, we will make it our New Year’s Resolution to stay on top of the “next big thing” that could either adversely or positively impact the achievement of your long-term investment goals and objectives. That “big thing” could be inflation or deflationary concerns that suggest positioning towards greater real asset exposures or lightening up. Alternatively, it could be sensible, yet unconventional portfolio allocations to more volatile asset classes, like bitcoin and gold miners, as anti-fragility plays on the bankrupt fiat money system. Hopefully, the end of 2023 will bring you great joy and satisfaction in some of your biggest life accomplishments for the year and the turn of the year brings you thoughts of resolutions that have you aiming higher or asking yourself what’s “ the next big thing” in your life. May prosperity, good health, and well-being be your constant companion in the New Year.