Some Are Betting on Red, Some on Blue. I’m Betting on Gold

Whether you support President Donald Trump or not, you must acknowledge that one of the bedrocks of his governing style is unpredictability. To some critics, Trump’s behavior and decision-making process may seem erratic, but I believe they make a sort of sense when viewed through the lens of game theory.

Take, for example, his hot-and-cold stance on a new coronavirus stimulus bill this week. On Tuesday, Trump unexpectedly tweeted that negotiations with House Speaker Nancy Pelosi would halt until after the election. “After I win, we will pass a major Stimulus Bill that focuses on hardworking Americans and Small Businesses,” he said.

That same day, Trump appeared to change his mind—reportedly after he saw how the stock market, and particularly airline stocks, reacted to the news. (I often say that he’s the first American president who keeps his eye on the stock market and sees it as a gauge of his success.) “The House & Senate should IMMEDIATELY Approve 25 Billion Dollars for Airline Payroll Support,” he tweeted.

airline stocks whipsaw at trump and pelosi haggle over stimulus
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Again, to some, this behavior might seem irrational, but in game theory, unpredictability can be an effective tool that leaves an opponent guessing.

In case you’re unfamiliar, “game theory” is the study of how and why people make decisions to achieve a certain outcome. More than one game theorist predicted Trump’s victory in 2016, and I wouldn’t be surprised to learn that some are doing the same in the 2020 contest.

That’s despite Trump trailing Joe Biden in national polls. Meanwhile, PredictIt data shows that betting odds favor a Biden win, with the spread having widened further since Trump’s positive COVID-19 diagnosis. But if you recall, then-candidate Trump was in a similar underdog position against Hillary Clinton heading into the election four years ago.

presidential betting odds favor biden over trump
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Follow the Trendline, Not the Headline

We’re only 25 days out from the election, and like Trump himself, it’s sure to be unpredictable. It could very well be contested, as there have been reports of both candidates hiring hundreds of lawyers in anticipation of a legal battle.

That’s why I believe it’s best right now to listen to the market rather than the negative political rhetoric, to follow the trendline and not the headline. As I shared with you in August, markets have accurately predicted presidential elections nearly three out of every four times since 1948. This is “Wisdom of Crowds” in action.

It’s also worth being reminded that 80 percent of all stock trading today is driven by quants and algos, which have no political preference. Their models are completely agnostic to who’s in the White House. Similarly, what matters most to us as active money managers are not the political parties but the policies.