Wagers on President Barack Obama’s re-election are rising in tandem with stock prices, just as the fortunes of his Republican predecessor George W. Bush did in 2004, suggesting incumbency counts more than party affiliation in the markets.
The BGOV Barometer shows the probability Obama, a Democrat, will win a second term, as measured by the online prediction market Intrade, has risen and fallen in close alignment with the Standard & Poor’s 500 Index. Intrade odds of an Obama victory reached a 16-month peak last week as the S&P 500 (SPX) advanced to the highest level since 2007.
Markets may not be responding to policies so much as to a preference for incumbents, Capital Economics senior U.S. economist Paul Dales in London said in Sept. 5 commentary titled, “Is the stock market cheering for Obama?” In 2004 the outlook for Bush’s reelection, in a race with Democrat John Kerry, also rose and fell with stock prices, he said.
“Markets like certainty,” Dales said. “The market doesn’t really prefer one party to another. With an incumbent, you know what the policies have been and how they will deal with things.”
A chart overlaying the S&P 500 and the Obama election odds indicates the president would likely have a greater-than-50 percent chance of winning so long as the index stays over 1,200, which seems probable, Dales said. The S&P 500 has risen 17 percent this year and closed at 1465.77 on Sept. 14, the highest since Dec. 31, 2007.
Odds of an Obama re-election rose to 64.8 percent as of Sept. 14, up from about 50 percent in December, according to Intrade. Polls show Obama taking a lead versus Romney following the Democratic and Republican conventions. Fifty percent favored Obama and 43 percent Romney in a Gallup poll Sept. 5-Sept. 11.
Both Obama’s odds and the S&P 500 have been boosted by “the state of the economy,” particularly as “the Eurozone situation has become stronger,” Dales said. “That seems to have had a beneficial effect on equities as well as Obama’s chances.”
Economists who have served in Democratic and Republican administrations disagreed on whether the correlation of presidential re-election odds and the stock market has any significance.
Democratic administrations have tended to favor expansionary policies that have boosted job growth, said Harvard University economist Jeffrey Frankel, who was a member of the U.S. Council of Economic Advisors in Bill Clinton’s administration.
“The markets realize this, not in the sense that they try to boost one candidate or another, but in the sense that they react positively when measures like Obama’s fiscal proposals pass and negatively when the Republicans block them,” he said.
“This sounds like a spurious correlation due to the two well-known perceived effects of good and bad economic news,” said Stanford University economist John B. Taylor, a Treasury undersecretary in Bush’s administration and a supporter of Romney.
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