Market Prefers Obama, Ever So Slightly
Which presidential candidate does the market want to win? A quick and imperfect look at the data suggests that, if anything, it's rooting just slightly for President Barack Obama.
Teasing out the market's preference is no easy task. Looking at how stocks and bonds move when one or the other candidate is rising in the polls is far from ideal, because the causality could go either way. Maybe stock prices are rising because the incumbent's poll numbers are improving, or maybe the poll numbers are improving because good economic data are pushing up stock prices.
In an unscientific effort to get around the causality problem, we looked solely at the data from Oct. 1 through Nov. 6, a period in which the candidates' debate performances appear to have been the primary drivers of their ratings, and in which the economic outlook was broadly stable. The period is also interesting because the leader in the polls changed four times, according to an average of polling data calculated by Real Clear Politics.
The main result: The market doesn’t care much about who wins the presidential election. A regression analysis suggests that the identity of the candidate leading in the polls explained only about 8 percent of the variability in bond yields. Separately, changes in either candidate's chances of winning, as calculated by poll quant Nate Silver of the New York Times, explained only about 9 percent of the change in the S&P 500 Index.
To the extent that the market did care, it seemed to prefer Obama. Bond yields were lower on days when he had the lead in the polls -- a fact that could reflect either lower expectations for economic growth or greater confidence in Obama's ability to fix the government's long-term finances. Stocks point to the latter explanation: The S&P 500 tended to rise on days when Obama's chances of winning increased, indicating a belief that he would be better for the economy (or at least for publicly traded U.S. companies).
To be specific, we can say with 90 percent confidence that an Obama lead lowers bond yields by somewhere between 0.001 and 0.086 percentage point. With the same level of confidence, we can say that a 1 percent increase in Obama's chances of winning boosts the S&P 500 by somewhere between 0.004 and 0.100 percent.
Weak as it is, the result indicates that the markets might be learning the lessons of history. Since 1927, the stock market has performed better and interest rates have been lower under Democratic presidents, according to research by economists Pedro Santa-Clara and Rossen Valkanov.
May the best candidate win.
(Mark Whitehouse is a member of the Bloomberg View editorial board. Follow him on Twitter.)
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