While not quite a “slam dunk”, the US election is, seemingly, Hillary Clinton’s to lose.
The Democratic nominee is well ahead in the opinion polls, enjoying a solid lead over Republican candidate Donald Trump.
Even history is on her side, according to Goldman Sachs’ US economics team, who note that “it is very unusual for the winner in public opinion polls at this point in the race to lose the popular vote in November”.
“In every election since 1952, the candidate leading in public opinion polls seven weeks following the convention (usually but not always around mid-September) has won the popular vote.
“(The) one near-exception was 1980, when President Carter and then-former California Governor Ronald Reagan traded leads back and forth several times over this period.”
However, while in a dominant position based on historic patterns, the polls have been narrowing in recent weeks. The contest, as shown in the chart below from Goldman, isn’t over yet.
Prediction markets, having priced the likelihood of a Democratic victory at over 80% just a few months ago, has steadily fallen, currently sitting at around 65%.
After defying the prevailing view since he first nominated for the Republican nominee last year, Trump, yet again, is failing to go away.
If anything, he’s getting closer. History is one thing, Trump is another.
The tightening in the race means that Monday night’s Presidential debate (mid-morning on Tuesday in Asia) will be watched closely, not only by the US voters and political onlookers worldwide, but also by financial markets.
No one really knows what to expect, particularly when it comes to Trump. For a candidate that has a proven track record of overcoming adversity, it’s little wonder why some believe he could surprise yet again by winning the encounter.
According to Goldman, it is “impossible to predict how these (the series of debates) will affect voter perceptions”, acknowledging that “while there are several examples of debates that shifted the polls considerably, there are just as many that failed to have an impact”.
“Overall, the median effect on public opinion is negligible following the first and last debates,” it says.
“That said, debates have had a larger effect on public assessments of the eventual election outcome.
“Following the first debate, the median probability assigned to the eventual winner of the election rose by about 5 percentage points (PP) after two weeks, and by 7pp around two weeks after the second debate.”
Based on what it’s done to expectations in the past, tomorrow’s debate could see Clinton take a near-unassailable lead or the race to the White House thrown wide open.
Perhaps making a Clinton victory even harder to achieve tomorrow, most voters — including swinging ones — believe that she will outperform Trump in the debate.
“A slim majority of voters expect that she will have a better debate performance (53%/43%), and among voters who indicate they could shift their support before Election Day, 60% expect Clinton will prevail,” notes Goldman’s.
“While on its face this is positive news for Clinton, this also raises the risk of underperforming expectations.”
It’s little wonder why up to 100 million people are expected to watch the debate.
Given its importance, it will almost certainly move financial markets, particularly should Trump prevail.
Most investors, mirroring the sentiment expressed in polls, see the most likely outcome — not only for the debate but also the election — as a win for Clinton.
Writing last week, Daniel Been, head of FX strategy at ANZ, said the result “could have important implications for how markets price political risk in the US”.
“In recent weeks Republican nominee Trump has narrowed in the polls, pulling ahead in key states like Ohio,” he said. “To date, this has been discounted by the markets as pundits explain away the surge on single factors.”
While investors have largely discounted the likelihood of a Trump victory on November 8, Been warns that should the recent momentum in the polls continue after the debate “the market will likely have to start thinking more seriously about how to price a Trump presidency”.
As with any increase in uncertainty, that will almost certainly mean increased financial market volatility as a result.