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.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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