Sunday, December 25, 2011

Will Obama be reelected? Just watch the stock market

President Obama's 2012 Intrade reelection odds now stand at about 52%, roughly a 2% increase in the last few days. What has changed to make the "crowds" assign a higher probability to this event? The payroll tax situation remains unsolved, the deficit issue still looms large, and the Republican candidates still have the same issues they had a week ago. The one thing that did change however is that we've had a stock market rally. Is there a relationship?

The charts below show that day-to-day the relationship may not be strong, but the similarity in trends is unmistakable. This is a six-month chart that takes us through the worst of the crisis (the Intrade contract wasn't very actively traded prior to that).  The two track well during earlier period as well, except when Osama bin Laden was killed, the President's reelection chances spiked for a short time.  The market went up too, but not nearly as much.

The top chart is the Intrade probability of Obama becoming president for the second term, while the bottom chart shows the S&P500 index.

Obama reelection probability vs. the S&P500
This is by no means a proof of causality, but the relationship may indicate that whatever factors drive the equity markets may be the same factors that benefit an incumbent president.  Once again we may have an indication that politics and the economy are even more inseparable than we imagined.
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