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The S&P 500 index of large U.S. stocks has marched higher in recent months in lockstep with Donald Trump’s re-election chances.Evan Vucci/The Associated Press

One factor helping drive Wall Street to new records is a growing conviction that the outcome of the 2020 U.S. presidential election is a done deal.

The S&P 500 index of large U.S. stocks has marched higher in recent months in lockstep with Donald Trump’s re-election chances. Mathematical models of voter behaviour now suggest it would take a sudden and unlikely slump in the economy during the coming months to derail the Republican’s path to another four years in the White House.

Mr. Trump’s wide-open path to re-election is likely to be seen as reason for celebration by investors who were spooked this past summer by the spectre of a newly elected president Elizabeth Warren raining havoc on U.S. banks and health-care companies.

Granted, Mr. Trump’s rising approval rating isn’t the only force driving stocks into the stratosphere. A cooling of global trade tensions has helped repair frayed nerves. So have some modestly upbeat readings on global manufacturing, as well as central banks’ continued fondness for easy-money policies.

bold prediction

Donald Trump is likely to be re-elected as president

in November, according to online prediction

market PredictIt. The price of a contract that pays

off if the Democrats win the election has been

steadily slipping in recent months. In contrast, the

price of a contract that pays off in event of a

Republican victory has been steadily increasing.

57¢∞

Republicans

54¢∞

51¢∞

48¢∞

Democrats

45¢∞

Nov. 8

16

24

Dec. 2

10

18

26

Jan. 3

15

23

Feb. 4

JOHN SOPINSKI/THE GLOBE AND MAIL

SOURCE: predictit

bold prediction

Donald Trump is likely to be re-elected as president in

November, according to online prediction market Predic-

tIt. The price of a contract that pays off if the Democrats

win the election has been steadily slipping in recent

months. In contrast, the price of a contract that pays off in

event of a Republican victory has been steadily increasing.

57¢∞

Republicans

54¢∞

51¢∞

48¢∞

Democrats

45¢∞

Nov. 8

16

24

Dec. 2

10

18

26

Jan. 3

15

23

Feb. 4

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: predictit

bold prediction

Donald Trump is likely to be re-elected as president in November, according to online pre-

diction market PredictIt. The price of a contract that pays off if the Democrats win the elec-

tion has been steadily slipping in recent months. In contrast, the price of a contract that

pays off in event of a Republican victory has been steadily increasing.

57¢∞

Republicans

54¢∞

51¢∞

48¢∞

Democrats

45¢∞

Nov. 8

16

24

Dec. 2

10

18

26

Jan. 3

15

23

Feb. 4

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: predictit

But U.S. politics seems to be playing a significant role in helping investors see past immediate dangers – most notably, the coronavirus that is threatening to disrupt supply chains around the world. The ultimate cost of the outbreak remains in doubt, but nonetheless the S&P 500 has surged to record heights.

It is difficult to see an economic reason for why stocks should be rising in the middle of an epidemic. However, it is easy to point to possible political motivations for some investors’ growing optimism.

Over the past three months, the chances of a Democrat winning the 2020 presidential election have been steadily shrinking, according to PredictIt, an online prediction market that allows people to buy and sell contracts based on future events. Meanwhile, the likelihood of a Republican victory has been climbing.

For much of 2019, PredictIt traders viewed a Democratic victory as the most likely outcome of the presidential election. But the picture flipped in early January. The prediction market now sees a Republican victory as substantially more probable than a Democratic one. The Republican edge is likely to grow in the wake of the botched Democratic caucuses in Iowa and the acquittal of Mr. Trump in the U.S. Senate’s impeachment trial.

As the odds grow against a Democrat winning the White House in November, a medicare-for-all plan that would disrupt U.S. health-care and pharma stocks looks more and more like a Democratic pipe dream. Tighter regulation of financial markets? A move away from trillion-dollar deficits? Those, too, seem unlikely to ever see the light of day.

In short, unrestrained Trumponomics is likely to rule – something that might be bad news for the United States in the long run, but could be good news for investors in the short run.

To be fair, Democrats aren’t entirely out of hope. But U.S. history suggests strongly that incumbent presidents usually get re-elected to a second term, barring a recession or war.

Economists who have built rigorous, by-the-numbers models to predict presidential elections find that presidents consistently win re-election if they preside over growing economies with low unemployment and low inflation. Unless the U.S. economy were to suddenly crash – something it shows no signs of doing – Mr. Trump has no reason to book a moving company any time soon.

Consider the model developed by Ray Fair, a Yale professor who began developing a tool to forecast presidential elections in the late 1970s. His model begins by assuming that incumbent presidents running for re-election have a substantial edge over challengers. The model then mixes in a handful of economic factors, such as the growth rate of output per person and the bite of inflation, to make a prediction about how much of the popular vote a candidate will attract.

The Fair model predicted a Trump victory back in 2016, when very few other forecasters did. These days, it shows Mr. Trump winning re-election in a landslide and taking more than 54 per cent of the popular vote.

The economics researchers at Moody’s Analytics agree that Mr. Trump is likely to enjoy another term in power. They go a step further than Prof. Fair by building in three different forecasting approaches – one based on political variables, another tied to pocketbook factors such as the cost of gas, and yet another focused on stock-market performance. Their model also looks at how results are likely to play out by state and in the electoral college.

“The average of the three model results suggests Trump would win in 2020 by an even larger margin than in 2016” if Democratic turnout is average or below average, Bernard Yaros of Moody’s Analytics said in a phone interview.

He says the Democrats have to pin their hopes on turning out an extremely high percentage of their supporters. But even in the case where they match their historical best performance in that area, the Moody’s model suggests the Democrats would only squeeze out a narrow victory. “It would be a nail-biter,” Mr. Yaros said.

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