from <u+201c> economics of u.s. policy uncertainty ,<u+201d> an august report by ryan sweet, adam ozimek and kathryn asher of moody<u+2019>s analytics: econometric analysis confirms the lack of a relationship between the s&p 500 and trump<u+2019>s electoral odds. regression analysis shows that day-to-day changes in trump<u+2019>s odds of winning had a statistically insignificant effect on log differences of the s&p 500. this is true even when controlling for log differences in canadian and british stock markets, which should isolate u.s.-specific changes in expectations about the future of corporate profitability. there are several possible reasons for the lack of a relationship. first is that investors, and businesses more widely, are discounting the odds of a trump election. however, forecasts based on polling data show odds of a similar magnitude. in addition, past research<u+2014>at least prior to the brexit referendum<u+2014>showed that betting markets have performed well as predictors of electoral outcomes. another possibility is that businesses are discounting the negative effects that trump would have on earnings and profitability. though the stock market can affect the economy, the two do not move in tandem. trump<u+2019>s policies could be bad for job and gdp growth but still be healthy for corporate bottom lines. in addition, businesses may expect trump<u+2019>s actions to be significantly constrained by the legislative and judicial branches, minimizing his impact on the actual economy. finally, trump may represent a tail risk, which is the risk of a low-probability event with a large impact. the odds of his election may be a small-probability outcome, and the dangers he represents to the economy conditional on election may be small-probability events with large negative effects. for example, a default or even loss of confidence in the national debt would be a potential tail risk: highly unlikely but very damaging. there is some evidence that tail risks can be systematically underestimated, which could explain the lack of stock market reaction so far.
notable & quotable: stocks don<u+2019>t sweat trump - wsj
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