The Standard & Poor’s 500 Index’s biggest rally to start a year since 1991 is coinciding with a 15 percent increase in President Barack Obama’s re-election odds, showing growing investor confidence in the U.S. economy.
The benchmark gauge for American shares has climbed as much as 7.5 percent in 2012, the most in 21 years, as unemployment fell and Federal Reserve Chairman Ben S. Bernanke vowed to keep interest rates near zero through 2014, according to data compiled by Bloomberg. The cost of a bet paying $10 should Obama win another term rose to $6 on Feb. 10 from $5.20 on Jan. 1 and below even money in November at Dublin-based bookmaker Intrade.
“A better economy clearly improves the president’s re-election chances,” David Kelly, who helps oversee $394 billion as chief market strategist for JPMorgan Funds in New York, said in a Feb. 8 interview. “The markets are pretty good at figuring this out. If you look at the economy and you look at the string of data you can pretty much figure out what the odds are.”
Prospects for an improving American economy have added almost $3 trillion to equity prices since October and helped spur a 14-percentage-point swing in the odds of re-election. While Bernanke warned on Feb. 7 of persistent dangers to the economy, Laurence D. Fink, chief executive officer of BlackRock Inc., the world’s largest money manager, said last week investors should have 100 percent of their holdings in equities because they offer higher returns than bonds.
Best Start Since 1991
The S&P 500 slipped 0.2 percent last week to 1,342.64, trimming its gain for the year to 6.8 percent, still the best start since the index surged 8.8 percent in the first six weeks of 1991. The index advanced 0.6 percent to 1,351.26 at 9:34 a.m. in New York today.
Netflix Inc., the Los Gatos, California-based movie rental service, has climbed 79 percent in 2012, Hoffman Estates, Illinois-based Sears Holdings Corp. rallied 50 percent and Bank of America Corp. in Charlotte, North Carolina, rose 45 percent.
Companies with earnings least-tied to the economy, last year’s market leaders, are trailing now. Utilities have retreated 3.5 percent since the start of 2012, the biggest decline in the index, while phone companies lost 2.8 percent and houseware makers are down 0.1 percent. Banks and brokers, technology companies and commodity producers have rallied 11 percent, on average, data compiled by Bloomberg show.
Stocks fell for the first time this year last week as concern Greece would reject budget reductions overshadowed data showing the U.S. economy is recovering. Fewer Americans than estimated sought jobless benefits and consumer confidence rose to the highest level in a year, data compiled by the Labor Department and Bloomberg showed on Feb. 9.
Obama’s re-election prospects have tracked the stock market for more than a year after Europe’s debt crisis threatened the global recovery in April and U.S. unemployment fell below 9 percent in October. His odds peaked in May, three days after the S&P 500 reached a 35-month high of 1,363.61, and bottomed a week before the index tumbled to 1,099.23 on Oct. 3, the data show.
Intrade bets proved prescient in 2008 when futures put Obama’s odds above 50 percent on all but eight days in the five months before the Nov. 4 election. John McCain averaged about a 33 percent chance he would win during the same period, Intrade data compiled by Bloomberg show. The week that traders bet McCain had a better chance of winning was when Lehman Brothers Holdings Inc. filed for bankruptcy in September 2008.
Former Massachusetts Governor Mitt Romney and other opponents have cast Obama as an ineffective steward of the economy and his policies, such as the 2009 stimulus plan, as failures. The gains may make it harder for Republicans, traditionally the party aligned with American business because of their appeals for smaller government, said Julian Zelizer, a political historian at Princeton University.
“For a Republican, good news on the stock market is not necessarily good news for them,” Zelizer said in a Feb. 9 phone interview. “They don’t want to be begrudging about it or complaining about good stock prices. But that said, they’re in a bind. Their major case in this election really depends on a bad economy, so any measure that that’s not true, like the market, undercuts the claim.”
The price of equities means less to voters than how much they make and what it costs to buy food, Kristen Kukowski, a spokeswoman for the Republican National Committee in Washington, D.C., said in an interview on Feb. 9.
“What is still lagging and going to be a problem for this president is economic confidence,” she said. “I don’t think that people are paying attention to the stock market every day.”
R.C. Hammond, a spokesman for Newt Gingrich, said: “Last time I checked, the 16 million unemployed were not worried about their stock portfolios.”
Bets Democrats would keep the White House were never cheaper than on Sept. 30 after $3.1 trillion had been wiped from equity prices in five months. The decline, which pushed U.S. shares within less than a percentage point of a bear market, came as S&P stripped the U.S. of its AAA credit rating and Obama’s debate with Congress over the debt ceiling threatened a government default.
Odds of re-election slid from 56.1 percent to even money as the S&P 500 dropped 11 percent in three days starting Aug. 4, data compiled by Bloomberg show. The week was one of the most volatile in the history of the American stock market, with the Dow Jones Industrial Average alternating between daily gains and losses of more than 400 points for four straight days.
Equity valuations have been stuck below the historical average for the longest periods since Richard Nixon’s presidency, even after the S&P 500 rallied about 20 percent since last year’s low in October. More than $469 billion has been pulled from U.S. equity mutual funds over five years and New York Stock Exchange volume slipped to the lowest since 1999 last month.
The index’s price-earnings ratio, a measure of how much investors will pay for U.S. corporate profits, has fallen to 13.9 times reported income, down from 24.1 at the end of 2009. The ratio slipped as low as 10.2 at the end of the 17-month bear market in 2009, when the S&P 500 declined as much as 57 percent.
The S&P 500 has gained 9.8 percent annually including dividends since 1926, compared with 5.7 percent for U.S. Treasury bonds, according to Ibbotson Associates, a research unit of Chicago-based Morningstar Inc.
“Too many people are underweight equities, and one of the things I’m trying to do is to get people to think about the opportunities they’re missing, with valuations at these levels,” Fink said in Beijing last week. BlackRock, based in New York, manages $3.5 trillion in assets, including $1.25 trillion in fixed-income and $1.56 trillion in stocks.
Of the 8.8 million jobs lost in the U.S. due to the recession, about 3.2 million have been recovered, figures from the Labor Department show. Bernanke cited Labor Department data released Feb. 3 showing the share of working-age people in the labor force had declined to the lowest level in 29 years.
Since World War II, only one U.S. president has been re-elected with a jobless rate above 6 percent: Ronald Reagan won a second term with the rate on Election Day 1984 at 7.4 percent, a drop of more than three percentage points in the previous 23 months.
“Yes, the better economy works to Obama’s favor, but the economy is not exactly on fire,” said Howard Ward, who helps oversee $35 billion at Gamco Investors Inc. in Rye, New York. “Of course, a lot can happen between now and November,” he added. “It is too early to put much weight in this.”
Since Obama’s odds bottomed, the U.S. unemployment rate has decreased from 9 percent to 8.3 percent as 715,000 nonfarm jobs were added to the economy. Forecasts for growth in gross domestic product climbed to 2.2 percent from 2 percent while an exchange-traded fund tracking retailers advanced 24 percent. His odds reached 60.7 percent on Feb. 9, the highest since June.
More than a year after Republicans from House Speaker John Boehner of Ohio to presidential candidate Ron Paul of Texas warned that the Fed’s second round of asset purchases risked a sharp acceleration in prices, the surge has failed to materialize. The personal-consumption-expenditures price index rose 2.4 percent for the 12 months ending in December, near the 2 percent top of the Fed’s preferred range.
“A reason you find a strong correlation with stocks is because the equity markets are a forward-looking indicator,” said Justin Wolfers, a professor of business and public policy for the Wharton School at the University of Pennsylvania. “We’re seeing increasingly good news on the state of the economy. That’s being reflected in stocks and also being reflected in an improvement in Obama’s position.”