Market Minute: Disconnect between Policy and Prediction Markets?

There's been a lot of talk about the "Trump trade" being in effect, leaving many, including myself, wondering: What if this perceived outlook is wrong? Where are the opportunities if things don't go as expected? 

Let’s break down a reversal that could emerge if prediction market indicators are off base. Based on the “Polymarket” indicators, there appears to be a clear disconnect between the prediction markets and polling averages, suggesting that some traders may be frontrunning a Trump victory. 

To start, let’s look at the policy that some investors believe would benefit from a Trump presidency, and those that might not. As expected, the energy market is the first area to examine. The "drill, baby, drill" policy, while coinciding with record U.S. oil production, has been perceived as a negative for oil prices. It’s not that the policy can directly drive supply higher, but there’s a concern from energy bulls that prior tactics may be used, like pressuring major oil exporters such as Saudi Arabia to ramp up oil infrastructure spending. This was done to mitigate supply disruptions caused by sanctions on Iran during the first Trump presidency. However, the Saudis likely underestimated import demand from the U.S., and the “promised deceleration” of U.S. supply never really materialized. Not political, ask energy traders who trades the physical market. This misjudgment, among other reasons, led to the current OPEC+ policy of reducing production to balance supply, which caused a reduction in the market share of Saudi Arabia and other OPEC+ members. Meanwhile, the U.S. shale boom experienced a second wave of enthusiasm. 

But here's the key: if physical energy players believe prior tactics may be used again, energy infrastructure spending could decline. After all, why invest more in infrastructure if policy changes are expected to increase supply and push prices down? This notion, combined with factors such as slowing global demand for petroleum products, has already put pressure on oil prices. A Trump loss could briefly push oil prices higher after the election, as short-sellers may rush to cover their positions, but may not result in a long-term trend higher. In this scenario, we might see a longer lasting rise in oil prices under the economic policies of a Kamala Harris administration. Of course geopolitical forces beyond either candidates control may change the calculus of any economic expectations beyond recent prediction market trends.