Whether you spent your Labor Day barbecuing or frying your laptop streaming college football and the U.S. Open at the same time, this week’s Kalshi Kit previews what’s top of mind to get your holiday recovery off right. 

• Stocks are erasing earlier rallies since their June lows as the fear of an economic recession looms closer. US shares have wiped out about half of a rally from their June lows after the Fed signaled it will stay hawkish on combating the hottest inflation in four decades. 

• Investors’ current stock exposure stands at the bottom-10th percentile of historical observations after a sharp drop last week. Investors are unwinding their equity positions as if a deep recession is already here.  

• There’s a new hairstyle that’ll be sweeping the High Street, as Liz Truss became Britain’s third prime minister in just over three years this morning. Truss will have to think on her feet to confront a policy decision that could shape the rest of her tenure: how to protect businesses and individuals from soaring energy prices caused by the continuing war in Ukraine.

• In August’s jobs report, nonfarm payrolls rose by 315,000 jobs in August, just below the Dow Jones estimate for 318,000. The unemployment rate climbed higher than expectations (to 3.7%), while wages also rose (up 5.2% from a year ago).

Last week saw the markets celebrate all too soon after the release of August’s jobs report. Hopefully analysts didn't schedule too many pre-long weekend coffee chats, because celebrations were soon cut short as the Dow, S&P 500 and Nasdaq Composite all finished the week down. But unemployment isn’t the only signal to consider in your investment decisions. This week, we’ll be diving into a factor that's even more influential to your portfolio: the midterms.

Deep Dive: When Political Polling was Down Bad 

There’s been a clear loser in recent history of modern elections – besides silver medalist. And that’s the polling.

Polls on inherently flawed humans, by inherently flawed humans, are just that: subject to flaws. Each election in modern history has set then-records for having the most inaccurate polling. Public opinion polls ahead of the 2020 election were the most inaccurate in a generation. These inaccuracies don’t just impact the journalists who clickbait them, or even the politicians who strategize based on them, but the everyday Americans who use them to guide their decisions.

The roots of polling failure run deep, and inaccurate forecasting can cause equally deep harm to investors. Here are four times in modern history where portfolios would have been down bad if investors had followed popular polls at the time. 

1.  The Math Wasn't Mathing for Romney

Before 2020, 2012 was the last year a challenger took on an incumbent president. There were more parallels than you’d think: Barack Obama was a president hugely unpopular with the opposing party, but faced an economy on the upswing. Meanwhile, Republicans’ choice was Mitt Romney. While he was their fighter, many criticize his campaign wasn’t. 

On the morning of the election, Romney’s senior advisers assured he would win “decisively.” Most polls predicted that certain demographics would not show up for Obama in 2012 the way they did in 2008. More, Romney’s campaign was adamant that public polls in the swing states were mistaken. 

What if you woke up that morning and also believed the polls? According to Romney’s campaign promises, which we can’t find evidence of a politician never not following through, investors' portfolios could have looked drastically different. 

For one, with a Republican majority, Romney may have seen the Keystone Pipeline approved and also loosened regulations on coal. Republicans would be expected to pass a large tax cut in 2014 that Romney signed. Based on his sentiment, alternative energy stocks would initially soar. 

Not to mention, Bain Capital would continue to receive much more free press. 

2.  If the Pantsuit Prevailed 

Polling received a black eye in the 2016 election, when Hillary Clinton was leading in the national polls and in key swing states but ultimately lost narrowly in the Electoral College. This might surprise you, but Beyoncé and Lebron weren’t the only ones impacted when polls led them to believe Clinton had all but secured the presidency. 

In fact, Wall Street was pricing a landslide win for Clinton. Based on some of her policies, Clinton was perceived to be good for stocks that benefit from Obamacare, environmentally-friendly policies (such as solar power companies) and minimum wage increases. Some investors were long on Netflix, citing Clinton could be a tailwind because of her support for net neutrality. And how could we forget all the retail stocks that would inevitably soar from panstuit sales? 

For more, here’s a full list of stocks Wall Street expected to soar if Clinton won.

3.  The Enron of Enron Conspiracies 

The 1994 elections set off an earthquake that rocked polling for years to come. 1994’s “Republican Revolution” saw the GOP take control of both houses of Congress for the first time in 40 years. 

In the first time since 1918, a congressional election was organized by the party on a national level. Republicans united under support for the “Contract with America” — a 10-point legislative plan to cut federal taxes, balance the budget and dismantle a host of welfare programs enacted and expanded during the decades of Democratic rule.

In the first 100 days of Congress, the Gingrich-led House enacted every bill, besides one, that had been cited in the Contract with America. Most notable for investors was Gingrich’s deemed “crown jewel” of the Contract: tax cuts. These cuts, as they are in present-day politics, were highly controversial – and entirely overlooked by pollsters.

These cuts would promote, as the GOP argued, “maximally beneficial investment activity.” Investors would be free to sell assets sooner than they would want under higher taxation. 

The 1994 election serves as an exemplar of the fallout if polls fail to pick up on the political ground moving beneath them. It can also be the one time this year you hear the name “Newt Gingrich” again. Or Enron, based on some scholars who argue this era of deregulation welcomed the grounds for…you know.

4.  International Bonus: The B-Word  

In honor of the U.K.'s third prime minister in just three years, we're throwing this one back to Brexit. Rumors have it the name originates from the more commonly-known "Megix," wherein a soap’s supporting character married a royal supporting character to level up as Oprah's main characters. 

It was a fallout all stemmed from polling inaccuracies. The result ousted the British Prime Minister, sent shockwaves across financial markets and raised doubts over the fate and composition of the European Union. But just how did pollsters get it that wrong?

Years later, most researchers now believe that David Cameron called the Brexit referendum to show that the country shared his favor to remain. To his surprise, 52% of the population voted to leave the European Union.

The U.K. EU referendum vote prompted a global massive market selloff as markets were priced in expecting a remain outcome. More than two trillion dollars were wiped out globally, the largest drop on record. 

That being said, correlation is not causation. The selloff could just have easily been due to the highly accurate reporting of Brexit’s impacts on Love Island.

TL;DR - Political markets serve valuable purposes. They help people imagine alternative futures and make it possible to hedge political risks in a more-direct way than proxy bets allow. For example, coal companies could go long on Bloomberg futures to mitigate some of the losses they anticipate from a candidate's energy policies. Alternatively, companies that would rely on government subsidies under a Green New Deal could do the same with Conservative contracts.

If polling doesn’t work, then we’re flying blind. You should get the chance to take back control of the plane.

Let's see what the Kalshi markets are saying in anticipation of the big week ahead:

Market Watch 👀

Fed Interest Rates 🏦

>3.00% Yes: 58¢    No: 42¢    

Kalshi markets are forecasting a 58% chance that the Federal Reserve will hike rates by at least 75 bps come September. On the flip side, markets are predicting a 42% chance that the Federal Reserve will hike rates by less than 75 bps in September.

• Better-than-expected economic data indicates that the Federal Reserve may continue to act aggressively in hiking interest rates. San Francisco Fed President Mary Daly said hiking rates by 50 or 75 basis points at the Fed's next policy meeting on Sept. 20-21 would be a "reasonable" way to get short-term borrowing costs to "a little bit above" 3% by the end of this year.

• 75 basis points is still considered unlikely by some economists, who expect several factors to conspire and bring inflation down. Investors are looking ahead to speeches from Federal Reserve presidents and a fresh rate hike decision from the European Central Bank due out later this week.

S&P500 Weekly Close Price 📉

3900-3949.99?  Yes: 25¢   No: 75¢  

Kalshi markets are predicting a 75% chance that the S&P 500 index value will fall outside 3900 and 3949.99 at the end of September 09, 2022 (4PM ET). On the other hand, markets are forecasting a 25% chance that the index will fall within the 3900 and 3949.99 range by market close.  

• U.S. stocks slumped today in a volatile trading session to kick off the short week. This performance does not bode well for investor sentiment, as analysts will continue to weigh what strong economic data and rising rates mean for the Federal Reserve’s aggressive tightening campaign.

• On the other hand, August ISM data this morning was stronger than expected, coming in at 56.9 versus expectations of 55.5. The report follows Friday’s jobs release, which also beat Wall Street’s expectations, showing a more solid U.S. economy than anticipated.

Inflation 📈

>-0.2% Yes: 48¢   No: 52¢

Kalshi markets are predicting a 48% chance that the Consumer Price Index will rise more than -0.2% in September. Conversely, markets are predicting a 52% chance that the Consumer Price Index will fall less than -0.2% in September.

• Markets have been slipping in recent weeks as inflation remains hot and the Federal Reserve stays on track to continue raising interest rates to try and tame persistently high prices. Investors' chief concern is that the Fed may go too far in raising rates and slam the brakes too hard. In an already slowing economy, this may potentially lead to a recession.

• Although the Fed has made clear that it intends to keep raising interest rates until it is sure that inflation is easing, recent reports may suggest otherwise. The unemployment rate rose to a six-month high of 3.7%, the first increase since January, as the participation rate climbed. The still-low unemployment rate means the Fed will continue to consider raising interest rates, but the extent to which they do is up for deba

And that's all for this week. If you want to learn more about Kalshi's recent Political Control Contracts proposal to the CFTC, we've got you covered.