Is it time to start trading the election?

Trading positions favoring a Trump win have been outperforming over the past week, as he has started to gain some momentum in the polls. Moreover, the odds of a Republican sweep have risen dramatically. It’s still quite close, but the movement in probability is enough to shift the markets.

Based on this prediction market aggregator, Trump has a 57% advantage over Harris’s 42%.

Poll watcher and statistician Nate Silver has Harris at a 54% advantage to Trump’s 46%.

Source: projects.fivethirtyeight.com

The reason Trump trades are moving is because a Trump win brings a reasonable chance of a Republican sweep, which will have far greater consequences for global macro than a Harris win, which will result in mostly the status quo. As a result, there has to be a “Trump risk premium” baked into the price going into the election as long as it remains close.

What’s also interesting is that Trump is pushing procyclical policies at the same time the Fed is delivering mid-cycle cuts. A Republican sweep where Trump gets his wish list of tax cuts, tariffs, and protectionism would result in fiscal and monetary policy boosting growth at the same time.

The only catch is that close elections are notoriously difficult to trade. I remember being on the trading desk in 2016 when the results were getting announced state by state. Going into election day, Hillary Clinton was favored in the polls and betting websites. The market perceived Clinton to be better for risk assets, and equities were pushing higher as the first of the election results started coming out. Out of nowhere, a few states swung in favor of Trump, and stocks suddenly sold off. The market then lurched back higher as a few other results came in favor of Clinton. The market swung back and forth as it tried to digest the results state-by-state.

Over the course of the day, it slowly became clear that Trump was going to win. I remember watching election trackers start drifting in favor of Trump, defying the expectations of everyone in the trading room. Finally, the tide of sentiment became too overwhelming. The market made up its mind on who was going to win and violently dumped S&P futures and bought up eurodollar and Treasury futures. Equities sold off to levels not seen for months. I was positioned for higher US yields at the time, and was down an uncomfortable amount of money in both the bank trading book and my own trading account at the time.

Under normal circumstances I would have cut my losses and licked my wounds. However, I had a feeling that the risk aversion would be short-lived. I knew the market hadn’t given much thought about the economic consequences of a Trump win. To some observers, Trump being president was simply unthinkable. Wall Street traders, most of whom leaned Democrat, had a simplistic view that went something like “Clinton good, Trump bad”, and therefore smashed the sell button as Clinton’s chances of winning evaporated (and this is why you should leave your political views out of your trading decisions).

My thesis behind being short bonds was that I thought Trump’s proposed tax cuts would be good, not bad for the market, and that stocks and yields would eventually realize this and go back up. Sure enough, at some point during my afternoon, equities and yields bottomed out and started to rally aggressively. Emboldened, I bought some USD/JPY, which was rebounding along with yields. The market, within the space of several hours, did a complete U-turn in how it perceived what a Trump victory meant for the economy.

I watched as my pnl turned from deep in the red to green. Confusion reigned in my Bloomberg chats as traders struggled to digest the price action. Many traders were caught wrong-footed by the sudden recovery in risky assets (Michael Lewis’s book “Going Infinite” has a great anecdote about how Sam Bankman-Fried was up millions of dollars trading the election results, but lost it all and more on the following V-shape reversal).

S&P futures

By the time I left the office, I had gone from having one of the worst trading days of the year to one of my best. Despite the dramatic turn in fortunes, I didn’t square up my trading book and chose to hold my positions overnight. I knew my positions had a long way to run, as this was day zero of the market pricing in the implications of a Trump presidency. The Trump trade ended up making 2016 one of my most successful years up to that point.

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The point of this story isn’t that election day will play out exactly the same way this time around (because it won’t). The point is that close elections are choppy and messy to trade, and the intraday swings can be violent. What the market believes to be “Trump trades” might not actually turn out to be Trump trades after the fact. If you are positioned for a Trump victory (like being short Treasuries, long USD vs MXN, or long BTC), the best case scenario for your pnl is that Trump gains in the polls and prediction markets so that he goes into election day with a comfortable cushion. If we go into the election with the odds stuck at a coin flip, I prefer squaring up and waiting for the outcome to become more clear.

Now, on to my paid subscriber section, where I discuss the positions I’ve been entering and exiting in my trading book.