Strategies: What if the Economy and Markets Are Even Better Than They Look?

In an interview, Professor Fair explained: “I don’t attempt to convert the popular vote into an actual forecast, state-by-state, with all the gerrymandering and other factors that are so important. I leave that to the political scientists.”

The second quarter G.D.P. growth — a variable in his equation that captures the good feelings generated by the economy and the stock market — had the effect of subtracting about 1 critical percentage point from the Democratic share in his projection. Another strong showing in the current quarter, which he defines as an annual growth rate of at least 3.2 percent, would move the Republicans ahead in the popular vote in November, according to his algorithm.

But he is the first to admit that his equations don’t capture the inimical style of President Trump. For the last presidential election, for example, Professor Fair’s algorithm indicated that economic as well as political factors strongly favored the Republican Party. His projections said Republicans would capture 56 percent of the popular vote, giving its presidential candidate a landslide victory. Professor Fair was off by 7.1 percentage points (though he did project a Trump victory, unlike most forecasters).

“Had the Republicans nominated a more mainstream candidate, they may have done much better — much closer to what the equation was predicting,” he wrote. Mr. Trump’s “personality” and combative approach to politics could reduce the Republican tally again in the midterm elections, according to Professor Fair, and swing the vote to the Democrats. “I just have no way of capturing that,” he said.

Mr. Trump’s unconventional approach to the presidency is undoubtedly making it more difficult, as well, to accurately assess the trajectory of the markets and the economy themselves.

Edward Yardeni, an independent stock market analyst, made that point in a series of reports in August. Mr. Yardeni, who describes himself as “a conservative-leaning fellow,” said that on contentious issues, from tax cuts to trade disputes to deregulation, financial markets have been “giving quite a bit of weight to the possibility that this all will lead to less protectionism and greater global prosperity” — and to a rising stock market.

That’s not my baseline assumption, but it could happen. What if the stock market keeps ascending, the economy continues to grow, and Mr. Trump and a flock of Republicans do their utmost to take credit for it?

I’m hedging my bets.

Article source: https://www.nytimes.com/2018/08/31/business/economy-markets-stocks.html?partner=rss&emc=rss