Investors are not great at predicting politics

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FINANCIAL markets are supposed to be the font of all wisdom, weighing up the information available and condensing it into a set of prices. Investors are presumed to have an insight into the future—falling bond yields are seen as a sign that the economy is slowing, for example.

But are investors that clever when it comes to politics? Gambling markets show how they assess political risk. They expected the Remain campaign to win the Brexit referendum and Hillary Clinton to become America’s president, and were proved wrong. Indeed, on Brexit, the mass of gamblers (the general public, in other words) backed Leave, but the odds were skewed by some wealthy punters who favoured Remain. Those rich gamblers were probably people who trade in financial markets; the plunge in the pound after the result suggests that most investors were caught on the hop.

Before the presidential election, most people on Wall Street to whom Buttonwood spoke thought that a victory for Donald Trump would be financial companies that are based in London, so it was tempting for those involved to think that it would not happen. The Republican agenda promised tax cuts for the better-off in America, as well as financial deregulation. Both would be good news for the denizens of Wall Street, so it is not surprising that they hoped their dreams would come true.

But it is a mistake to think that investors know something about politics that everyone else does not. Before elections, they must simply rely on the opinion polls. And analysing corporate balance-sheets is a lot easier than making sense of the policy pronouncements of elected officials—especially when a leader is as unpredictable as Mr Trump.


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