Home > Investing > Would the market have jumped 23.5% if Romney won?

Would the market have jumped 23.5% if Romney won?

The Theory

I don’t pretend to know what the stock market will do from day to day, but what I do believe is that no one else does either.  If they did, they’d be rich… so it fell 2.5% yesterday, and some were making that claim that this was because Obama had been elected instead of Romney.  The basic premise is that since Obama is “anti-business”, businesses lost value as soon as he became president.

Now the stock market can move on any day for any number of reasons, but let’s just assume for now that this really is the reason.  Investors thought that the next four years wont be as profitable, so it’s time to sell.  This seems like a reasonable assumption before you look at the facts.
Everyone smart enough to be a financial analyst had to know who was going to win on Tuesday.  When you look at the various poll aggregators, it’s obvious that Romney had a little under a 10% chance of winning on Tuesday.  Nate Silver was pretty much right about everything.  It’s not because he’s some sort of prophet, it’s because it all comes down to cold, hard statistics and polling.  Anyway, once you get to know Nate Silver’s blog, you will realize that although it was a close race, the final result was never all that close.
So let’s assume that everyone knew that Obama had a 90% chance of winning.  If the stock market really was going to rally if Romney won, how much would it have rallied.  This supposedly “efficient” market fell 2.5% on news that a highly probable event occurred   So would the market have risen 2.5% * 9 = 23.5% had Romney won? (Obama was 9 times more likely to win, so an efficient market would reward you by 9X for holding all that risk).
Stock Market History
Since the stock market has never had a 1 day gain higher than 11.08%, I think it’s safe to say that 23.5% would be an unprecedented increase.  Not that it couldn’t happen, just that’s it’s rather unlikely.
Only one of the next three statements can be true.
1. The market was overvalued on election day (investors didn’t understand Romney’s low chances)
2. The market became undervalued on the day after the election (investors sold stock emotionally instead of based on the numbers)
3. The market actually would have jumped 23.5% in one day if Romney had won (investors are rational)
Personally, I think it’s number 3, but like I said before, my only truth about the market is that no one actually knows what’s going to happen next.  So like all analyses, it’s just a guess based on a hunch.  But I have been meaning to get some more money into my index funds, so I took the opportunity to add a little more.
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