“Trust, but verify.”
The term “October Surprise” references the potential for a late surprise in the U.S. Presidential election that alters the outcome of the election. The idea first came into vogue in the 1980 U.S. Presidential election between Jimmy Carter and Ronald Reagan.
One of the primary foreign policy issues in that election year was the Iranian hostage crisis that began on November 4th, 1979. As we all know, Reagan won the election. On the day of his inauguration (some 20 minutes after his inaugural address concluded) the Iranians announced the release of the fifty-two Americans held as hostages. Coincidence?
In the politicized world of Washington, DC, speculation was rampant that Republicans had conspired with Iran to time the hostage release until after the election to make then President Carter look weak. The supposed "quid pro quo" for the Iranians delaying the release of the hostages was that the Reagan Administration would then reward Iran with weapons and unblock frozen monetary assets.
Despite numerous congressional hearings and investigations, no evidence was ever found to substantiate the idea of collusion between Iran and the Republicans, but it certainly made for great newspaper headlines! And thus the conspiracy theory known as the October Surprise was born.
Back to the Global Macro Grind...
In this election year, the line between conspiracy theory and reality is slowly blurring. The most recent conspiracy theory that became reality was of course that Hillary Clinton was sick. Over the last few weeks, conservative leaning websites and Republicans talking heads have floated the idea that she had some serious illness. By extension, they went on to question her capability to serve as commander-in-chief.
Well, it turns out that Clinton actually is sick with pneumonia, although she was diagnosed with pneumonia many weeks after the chatter of her being ill began. This is unlikely to be the October Surprise many expect, but it does introduce another twist into one of the strangest Presidential campaigns in modern electoral history.
Interestingly, the 1980 election was the last time that a candidate who was trailing on October 1st, according to Gallup, went on to win the election. In the eight elections since 1980, the candidate that has led on October 1st has gone on to win the Presidency. So if history is any precursor, the next few weeks will be telling.
As the race stands today based on poll aggregates, Clinton is up by approximately 2.1 points. This is within in the margin of error and according to Nate Silver at 538.com gives Clinton a 65.0% probability of winning. If you are a Clinton supporter, this isn’t a terrible position except one small thing that we stock market operators deal with daily: momentum.
There is no denying Trump has the momentum. Whether it is Clinton’s sickness, a deflating of her post convention bounce, Trump just getting some verbal discipline, or recent miscues of Clinton’s, the poll numbers between the two candidates have narrowed meaningfully over the last month. The Chart of the Day below highlights this graphically over the last 30 days.
In the same period, Trump’s favorability has increased while Clinton’s has decreased. Both candidates remain two of the most unfavorable Presidential candidates ever with the delta between favorable and unfavorable at -13% and -19%, respectively.
Even though Clinton has led consistently and sometimes by a wide margin, we’ve long held that that this race will be close and Trump has a legitimate chance of winning. This view stands today. Ironically, the reason that Trump may have a real chance at winning is the demographic makeup of his supporters.
Many have critiqued Trump’s inability to attract minority voters as likely death blow to his campaign. A recent CNN poll emphasizes this with Trump ahead in the white vote 54 – 33 and Clinton leading the minority vote 70 – 13. Far and away, Trumps polls the best with whites without a college degree and in that same CNN poll led that demographic by 66 – 23.
In a nation in which the growth minority segment of the population and electorate is outpacing the white portion, the pundits should be correct. Except for one small fact ... the swing states are disproportionately white.
According to our partners at the non-partisan Cook report, they projected just over 70% of the electorate this election to be white. There are roughly 15 so called “swing states” and of those 15 states, 10 of them have more white voters than the national average. So, it’s not too difficult to see that if Clinton drives a lower minority turnout than President Obama (a reasonable assumption) and Trump can take a larger share of the White vote than Romney did, he may be better positioned than expected in the swing states.
The conclusion of all this? If you are expecting an October surprise, you shouldn’t (sorry Julian Assange!). The race is very close at the moment and if Trump can maintain his momentum the race will narrow even more. Since Trump does have a legitimate shot at winning, it’s time to start thinking through scenarios with either Trump or Clinton as President.
Over the coming weeks, we have a number of events that will help you get up to speed on policy scenarios post the election. If you’d like to attend any of these events or get the materials, please email .
- Our healthcare policy analyst Emily Evans hosted a call yesterday discussing the health platforms of each candidate. She is available for one-on-one briefings;
- Today at 11am, our defense policy analyst former Lt. Gen Emerson "Emo" Gardner USMC Ret. (former CFO of the Pentagon) will be hosting the former Under Secretary of Defense for Dr. James Miller to discuss the key policy questions facing the next President;
- On Tuesday September 20th, JT Taylor will host a granular election update via a conference call with Charlie Cook from the Cook Report;
- On Wednesday September 21st, we will be hosting a group of investors in Washington in meetings with key decision makers from “both sides of the aisle” to discuss the election and beyond (email your salesperson asap if interested);
- Our entire policy research will be hosting a roundtable conference call to discuss the most up to date policies proposals of each candidate and an overview of the current Congress on Monday September 26th;
- Finally, we will be hosting a small group dinner with Scott Reed, the chief political strategist of the U.S. Chamber of Commerce in New York on September 27th.
We hope you can join for some, if not all, of these events. Preparation will be key for stock market operators heading into the election. As Benjamin Franklin famously said:
“By failing to prepare, you are preparing to fail.”
Our immediate-term Global Macro Risk Ranges and intermediate-term TREND Research Views (in brackets) are as follows:
UST 10yr Yield 1.47-1.73% (bearish)
SPX 2115-2167 (bearish)
Nikkei 160 (bearish)
VIX 14.03-19.22 (bullish)
USD 94.53-96.27 (bullish)
Oil (WTI) 42.77-47.54 (bearish)
Gold 1 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research