As stock market fares, so will Obama

CBS

(MoneyWatch) Will President Barack Obama win another term?  If he does, it will have little to do with health care or televised debates. The only thing that matters in his re-election is largely outside of his control, and that is how the stock market performs between now and November. Here's why.

It turns out there is a booming financial market for American politics via an Irish firm called Intrade. You can bet on many political outcomes at Intrade, with the odds of each bet determined by the free market, much like any stock exchange.

Referring to the robust market for trading in American politics, Carl Wolfenden, exchange operations manager at Intrade, noted that though the company also makes markets to speculate on European politics, such trading isn't nearly as active. Trading in American politics is likely more active because "in America, politics is a blood sport," he said. 

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As you might imagine, the U.S. presidential election is the most frequently traded instrument. As of this writing, Obama shares were trading at $5.59 a share. That means a share purchased for $5.59 can be cashed in for $10 after an Obama victory or end up as a worthless security if he loses. Put another way, the $5.59 price translates to the market believing Obama has a 55.9 percent chance of winning.

It appears that, on average, every 1 percent change in stock prices translates to a 1.14 percent change in Obama's prospects of a November victory. In case you think the relationship between U.S. stocks and Obama's chances are random, statistically the odds that this relationship is real are well over 99.999999999 percent. 

Data from Intrade and Willshire Associates

I spoke to Brian Montopoli, senior political reporter at CBSNews.com, about the link between the stock market and the upcoming election. He said:

There's no question that the economy is the most important issue in this election. Mitt Romney's central message has been that President Obama does not deserve re-election because he has failed to fully turn the economy around in the wake of the crisis. The president's fortunes are undeniably tied to what happens in terms of GDP growth between now and November.

The stock market, unemployment rate, and rate of GDP growth are probably the best indicators out there of whether President Obama will win another four years. Discouraging numbers on those fronts translate into pessimism among the American people, and the president will have a very hard time defeating Romney if Americans don't think he's improving their economic circumstances.

What this means for Obama

The stock market is a forward indicator of how investors think the economy will perform. Stocks bottomed out in March 2009, long before the economy started turning around. So if stocks sputter between now and November, it bodes ill for the economy and even worse for Obama. But if markets hold or surge, Obama will likely get another four years. 

More specifically, as long as the stock market declines less than 5 percent between now and November, the odds are looking pretty good for the president. Of course, sometimes markets move more than 5 percent in a single day. This translates to an S&P 500 index price of 1,286 or better, or a Dow Jones industrial average price of 12,134 or higher, as being good news for Obama. Lower than these indexes indicates good news for Romney.

[automaxamillion]

Based on historical election information, US stocks perform better when the President,(Incumbent)is re-elected. So it is not only better for the economy to vote for the Incumbent, investers can make money.

[JerryNA100]

Considering how much better the American economy and stock market have performed historically under Democratic administrations than under Republican ones, I'm shocked that business people still think it makes economic sense to vote GOP. I guess that's why <strikethrough>misinformation</strikethrough> lies and short-term thinking are so much a part of both business and political advertising.

[Allan_Roth]

JerryNA100

I don't think we can make a statistical conclusion that Democrats are likely to be better for stocks than Republicans. But the data certainly calls into question the blind belief that Republicans are better for business than Democrats.

[Jeff_PE]

I find it fascinating that all of the Obama haters have this incredibly gloomy view of the economy. In the town where I live near that has 100K population, Boulder, CO, four new hotels are being built we were told in the business section of the local newspaper on Monday. I have family in Charleston, SC where there was a giant Boeing plant built that they are now adding on to. Two places far apart, both seeming to be just fine. Manufacturing has been up almost every month in the last few years, except for May. Manufacturing employment has increased also. Someone has to buld those Chevy Cruze and Ford F-150's It's not that awful everywhere.

[Allan_Roth]

Jeff_PE,

Unfortunately, politics and facts have virtually nothing in common - Perhaps it's the only thing more emotional than investing.

I live in Colorado Springs and many call your town the People's Republic of Boulder. I then point out that in Colorado Springs, the city owns the public utility, hospital, and even the graveyard. I point out the number and size of public companies born in Boulder vs. the dismal track record of Colorado Springs. Finally, I point out that Colorado Springs has five times the population of Boulder.

Come down sometime to visit the People's Republic of Colorado Springs.

[venusvegasvada]

Obama has thrown himself on the mercy of the American low and middle classes. Romney's engine is being fed by the Rich and Wall Street. A simple look at who's donating what reveals that.

To say that Obama's re-election hinges on the performance of stock market returns between now and the end of year really misses the reality of what is going on with this years election.

It's hard to imagine a more polarizing choice the American public has and I don't see the bulk of the American people checking their portfolio's prior to making up their minds on this one.

It will be very interesting to see which way the American public wants to take our country in Nov, but I don't think a stock market value will have anything to do with it this time. Too many other issues at stake.

[Allan_Roth]

The data says otherwise. Remember that the economy is the #1 issue and that the stock market is a forward looking indicator of the economy.

[In_Perspective]

I have to disagree - as a middle-class citizen I am looking very closely at the market and at which candidate I believe will bring the most success to business and future endeavors. Economy is number one in my opinion and as Mr. Roth aptly replies, right or wrong, the market is our best predictive voice of the future of the economy. So, you bet I'm looking at Obama and Romney's ability to influence the stock market.

[credibility2]

How many stock investments does Obama have directly related to the health care reform initiative he pushed? Wouldn't be surprised if he did this to orchestrate more money for himself.

[Allan_Roth]

credibility2. Then you might be surprised to know he isn't directly invested in stocks related to health care. He is mostly in Treasuries but does have some S&P 500 index funds.

http://pfds.opensecrets.org/N00009638_2011.pdf