By the looks of Wednesday morning’s trading, investors weren’t fully prepared for President Obama’s reelection. Initial trading sparked a broad downturn in stock prices, with significant weakness in areas most likely to be hit by a tougher regulatory environment.
In particular, coal stocks such as Arch Coal (NYSE:ACI) and large-cap financials such as Bank of America (NYSE:BAC) and Goldman Sachs (NYSE:GS) were thoroughly pounded. While this action reflects investors’ adjustment to the new reality, there was really no need to be surprised: All it took was an examination of Intrade’s prediction markets.
For those who are unfamiliar, Intrade’s website allows visitors to buy or sell shares (using actual money) of contracts that predict the outcome of various events. Each event concludes with a binary result: A correct prediction on Obama’s victory, for instance, would have paid off at the full $10 value, while Romney “shares” dropped to $0 at expiration. Prior to the contract close, shares trade in that $0 to $10 range — allowing site visitors to see the likelihood of the particular event occurring.
It was here that Intrade bettors provided a beacon of clarity in the weeks of murky news flow that led up to the election. National polls persistently showed a tight race with a gap of plus or minus one percentage point for each candidate. And these fluctuations were accompanied by a great deal of rancor about polling methods and potential media bias.
But while the media focused on this “horse race,” the Intrade crowd had it nailed: At no point did the Romney contract rise above the 45% level, even in the initial surge in his poll numbers that followed the first debate. Conversely, the Obama contract never indicated that his chance of victory was less than 55%, even at the peak of criticism regarding his debate performance.
An investor focused on media coverage of Romney’s bounce risked the chance of being misled, but anyone who kept an eye on Intrade market could see that its bettors weren’t convinced. As the saying goes, “price is truth” — and in this case, price provided an ample warning of the final outcome.
This wasn’t the only event that the Intrade market predicted correctly. The site also enabled bettors to wager on the outcome for 12 key swing states. Here, it correctly forecast Obama’s victories in Pennsylvania and Ohio.
In Pennsylvania, which the media portrayed as being hotly contested, the Obama contract never showed less than a 75% chance of his winning the state from late August onward — even after the first debate. In Ohio, the Obama contract showed an uptrend from the low 50s to 70 in the final week of the campaign even as the state remained in the “swing” category on just about every map.
The Intrade market was less effective in predicting the results in Florida, Colorado and Virginia, all of which Obama won and where bettors favored Romney until the final week. On a net basis, however, the market was a better indication of what was coming than maps that left “toss-up” states out of the electoral equation.
How did Intrade do on election night itself? Again, the betting provided some lead time on the news. While not actionable from an investment standpoint, the Intrade market saw Romney shares crash from the high 20s to the mid-single digits from about 8:30 to 9:15 ET. The networks were reluctant to call the Obama victory too soon, but the Intrade market showed no such hesitation.
Looking beyond the main event, Intrade also called it right in both the House and Senate, which also would have helped investors look past the potential confusion created by discussions whether either would change hands.
Is Intrade perfect? No. After all, what market is? But the final four weeks of this election campaign produced a tremendous amount of “noise,” both from the punditocracy and the false signals of national polls that had the race essentially tied. In reality, Mitt Romney had a tremendous uphill battle of electoral math to overcome — as evidenced by what should be a 332-206 Obama Electoral College win once all of Florida’s votes are counted.
Intrade bettors saw this and did excellent work in predicting the final outcome. Next time, investors should let the market — not the polls — be their guide.