Back in November, I guessed right about Trump winning the election. However, I guessed wrong when it came to the direction the market would go. And I lost a fair amount of money because I failed to take something into account: the demographics of people who are market movers.
Looking at the most recent Rasmussen poll, 53% of those polled thought that the country was moving in the wrong direction. And yet, the S&P 500 (SPY) has been making new highs and the VIX is hovering around 12, driving (VIXY) way down. I suggest that the apparent disconnect has to do with demographics.
Sentiment for Trump varies considerably by sex, race, age, and political party, etc. Whites and males, for instance, favor Trump, but blacks and females disapprove of him. Republicans are strongly in favor of Trump, while Democrats strongly disapprove.
- Those who are in favor of Trump are the same people who are market movers. These people are active investors and day-traders, or they are investment advisers. These people are primarily white males, Republicans, and people over 39.
- Those who oppose Trump are largely passive investors, and either follow an adviser’s suggestion or simply invest in index funds. These people are mainly non-white females, Democrats or Independents, and people under 40.
Roughly a year ago, sentiment about the direction of the country, by the aforementioned demographics, was almost the opposite of what they are today. During that time, the S&P 500 (SPY) was nearing an apparent top and was more or less moving sideways. Additionally, using data from 8/1/2016 through 3/13/2017, excluding 9 points which still need to be filled in, the correlation with sentiment about the direction of the country, in total is 85.33%, with males 86.79%, with females, 75.47%, with whites 93.59%, with blacks -84.45%, with other “races” 37.94%, with Republicans 92.11%, with Democrats, -85.22%, and with other parties 88.76%. This suggests that the direction of the market is most closely connected to the sentiment of whites and Republicans.
According to “The Changing Demographics of Advisors,” over three quarters of all investment advisers surveyed were male. And less than one quarter were under 40. This fits rather well with the two conjectures.
Investor sentiment is the direct factor which drives price action. That is the reason why technical analysis is so useful. But news does matter, as it affects sentiment. And if the conjectures listed in this article hold, then it is easier to judge how sentiment will change, based on the political landscape. If approval ratings for Trump start to drop, among the market movers, the market should follow, at least in the short term.
In the long run, however, overall sentiment is going to have an effect on economic activity. And that will impact the global trend of markets. Trump’s approval rating has been declining, and it was already fairly poor. And if people, in general, think that the country is heading in the wrong direction, they will be more conservative in their spending habits.