Election Digestion

The short answer is that markets are paying close attention to outcomes, but it is too soon to tease out policy specificity that may impact broad capital markets. Before sharing our perspectives, I will reiterate that we look at capital market outcomes linked to policy through a completely apolitical lens. For those who can recall the original Dragnet show or the 1987 film adaptation starring Dan Aykroyd and Tom Hanks, within political analysis, we adopt an “all we want are the facts” disposition à la Officer Joe Friday’s frequent investigative tagline. Public policy decisions and legislative changes rarely have pan-market implications (recent exceptions include the Liberation Day tariff rate changes, which had significant capital market implications for an abbreviated time period) but instead tend to have more sector-specific implications. For example, legislative changes to drug pricing can impact the pharmaceutical sector, or agricultural subsidies can drive farm equipment manufacturer fundamentals.

The most demonstrable market takeaway from recent primary elections in July and early August is that both dominant parties are becoming more deeply entrenched and further from more centrist approaches within their respective parties. Within the Democratic Party, the Michigan Senate, Connecticut congressional, and Wisconsin gubernatorial races oscillated between incumbents and challengers, as well as the extent of political ideologies, with a preponderance of incumbents losing races, based on Associated Press data.¹ For Republicans, President Trump’s influence continues to carry election weight, with some notable endorsements for challengers in states including Indiana, Louisiana, Kentucky and Texas.² However, in gubernatorial races, local politics appears to still play an important role for both parties, as endorsements by major political figures (or lack thereof) did not necessarily lead to wins.³ From our vantage point, this deepening divide does not come at an opportune time. With our consistent message that the bond market is in control of capital market outcomes, we continue to monitor how bondholders will view political polarity and how that may shape their desire to lend to Uncle Sam, which we will cover later in this piece.

The Commodity Futures Trading Commission (CFTC) defines prediction markets as offering “a variety of products designed to help the public forecast, plan for, hedge, and even harness perceptions of future events.”⁴ Kalshi is a fully regulated U.S. event contract exchange, allowing buyers and sellers to express views on a given phenomenon. We use prediction markets to understand the proverbial wisdom of the crowd; the more volume and participation surrounding a given event, the more insights we may be able to glean about expectations.

Kalshi’s event contracts provide to-the-second updates on House and Senate race expectations. As of Friday morning, Kalshi’s prediction markets assigned a 51% chance that Republicans retain control of the Senate and a 15% chance of a Republican House majority.⁵ Prediction market odds for Republican control of the Senate peaked at 73% in November 2025 and bottomed at 45% during the throes of the Iran conflict in April.⁶ Republican House control odds peaked at 45% in late October and are just a percentage point above lows from earlier this week.⁷

So how well do prediction markets work relative to traditional political outcome measures like polling? A graduate school professor of mine, Justin Wolfers, along with Eric Zitzewitz, published seminal research on the topic in 2004, and with the growth of outlets like Kalshi, Polymarket and others with global reach, their conclusions appear to hold true. Wolfers and Zitzewitz found that “Drawing together data from a range of prediction contexts, we show that market-generated forecasts are typically fairly accurate, and that they outperform most moderately sophisticated benchmarks.”⁸ The authors concluded twenty years ago that “Prediction markets doubtless have their limitations, but they may be useful as a supplement to the other relatively primitive mechanisms for predicting the future like opinion surveys, politically appointed panels of experts, hiring consultants or holding committee meetings.”⁹

Like any market, the weight of buyers and sellers (also known as herding behavior) and lower liquidity can impact their effectiveness, but even seeing the polling mismatches within races this week (David Crowley was trailing 20 points behind Francesca Hong in two polls but wound up winning by half a point, and Abdul El-Sayed held a double-digit polling lead in the Michigan Senate race a week before the election but won by a mere point) suggests that prediction market power is real relative to polls. 

We continue to expect a glass-half-full, positive outcome for diversified portfolios. Where we have mandates for more tactical approaches, we are leaning toward growth assets and real assets at the expense of fixed income or bonds. That positive view requires some help from consumer activity, corporate capital expenditures and those entities to be able to finance their spending.

The U.S. government issued 30-year bonds this week at an auction on Thursday, selling $25 billion of new bonds at a yield of 5.216%, the highest rate since 2001. In addition to historically high yields, as one analyst recapped, “Treasury is locking in a rate for three decades at a moment when the average rate across all its outstanding interest-bearing debt is just 3.447%, so every long bond sold at 5.216% widens the gap between what the government used to pay and what it now owes.”¹² Demand for the bond auction was positive, with the Treasury receiving 2.4x the auction size in total bids, which is roughly in line with recent trends.

We are keeping a close eye on foreign demand for U.S. debt, which has been stable across recent auctions but has our attention. With increased polarity around the world with respect to trade, and as highlighted earlier, heightened division within domestic political parties, we cannot assume that demand for U.S. bonds is globally insatiable. Capital markets are very focused on the Federal Reserve and what may happen with short-term rates, but we are more concerned about longer-term bonds and maturities. Increased indebtedness, more divisive politics and higher leverage do not necessarily mean that borrowing costs will increase, but these factors certainly envelope preconditions for higher debt costs that could challenge everything from AI ecosystem buildouts to consumer purchasing resilience.  

Capital markets digested two major inflationary measures this week, including pan-European consumer price index (CPI) data along with U.S. CPI and producer price index (PPI) data. European inflation trends were still above the European Central Bank’s (ECB) 2% target, with headline inflation up 2.9% in July following a 2.8% reading in June. Core inflation, which strips out food and energy, saw a 2.5% increase, also a tenth of a percent higher than June. Services inflation, which is the biggest European inflation driver at 47%, remained sticky at 3.3%, suggesting higher wage growth and domestic demand.¹³ While these are positive variables, given the ECB’s focus on price stability, this report will challenge them to abate their wait-and-see approach and may drive them to hint at higher rates. Germany, Spain, France and the Netherlands all saw inflation pick up in July, while Italy featured more moderate output.

The U.S. CPI and PPI data offered more optimism. Although headline CPI still registered 3.5%, a tenth of a percentage point better than June, core CPI fell to 2.5%, the lowest reading since March 2021. Shelter costs rose again and accounted for roughly two-thirds of all cost increases, but energy price increases abated in a continuation from June trends.¹⁴ The PPI data showed no change despite anticipated increases of 0.2%, and goods prices fell, but similar to the European experience, service inflation remains elevated.

With two weeks until the Federal Reserve’s Jackson Hole symposium, these reports offer Chair Warsh cover to remain taciturn on forward interest rate policy guidance (not that he may need an invitation from economic data to do so), but markets will be paying close attention to what he may be saying about tools beyond interest rates and updates on the various task forces he has deployed. Again, we are more focused on longer-term borrowings given their consumer and business impacts, but we will be getting our popcorn ready for any and all communication that may emerge.

¹ The Associated Press. “2026 Election Results.” https://apnews.com/projects/elections-2026/. Accessed 14 August 2026.

² Ibid

³ Ibid

⁴ The Commodity Futures Trading Commission. “Understanding Prediction Markets and Event Contracts.” CFTC Learn and Protect. https://www.cftc.gov/LearnandProtect/PredictionMarkets. Accessed 14 August 2026.

⁵ Kalshi Prediction Markets. Politics-Congress. https://kalshi.com/category/politics/congress?order_by=event-volume. Accessed 14 August 2026.

⁶ Northern Trust Wealth Management Research, Kalshi Prediction Markets. Politics-Congress. https://kalshi.com/category/politics/congress?order_by=event-volume. Accessed 14 August 2026.

⁷ Ibid.

⁸ Wolfers, Justin, and Eric Zitzewitz. 2004. "Prediction Markets." Journal of Economic Perspectives 18 (2): 107–126.

⁹ Ibid

¹⁰ Papamichalis, Theofanis and Ryu, Dean and Wilson, Mungo Ivor. “Divided Government and the Stock Market” (November 27, 2022). Available at SSRN: https://ssrn.com/abstract=4287033 or http://dx.doi.org/10.2139/ssrn.4287033. Accessed 14 August 14, 2026.

¹¹ Livnat, Joshua and Rubin, Amir and Segal, Dan. “Divided We Fall: Congressional Cycles, the Stock Market and Firm.” Available at SSRN: https://ssrn.com/abstract=4282027 or http://dx.doi.org/10.2139/ssrn.4282027. Accessed 14 August 2026.

¹² Warding, Shelly. “Treasury Pays 5.216% on 30-Year Bond, Costliest Long Debt Since 2001.” Prime Rates. https://primerates.com/treasury-pays-5-216-percent-30-year-bond-costliest-since-2001/. Accessed 14 August 2026.

¹³ Eurostat. “Inflation in the Euro Area.” Statistic Explained. Data from July 2026. https://ec.europa.eu/eurostat/statistics-explained/index.php?%20title=Inflation_in_the_euro_area. Accessed 14 August 2026.

¹⁴ U.S. Bureau of Labor Statistics. “Consumer Price Index Summary.” BLS Economic News Release. August 12, 2026. https://www.bls.gov/news.release/cpi.nr0.htm. Accessed 14 August 2026.