Truck and Barter: Bush or Kerry: Who's the market better for?

August 30, 2004

Bush or Kerry: Who's the market better for?

By Ian

Most investment shows I've seen (and yes, I watch a lot of cable news, so I happen on these on weekend mornings), are studiously trying to predict the results of the coming presidential election. The thought is that, for varying reasons, one candidate might be better for markets (or certain portions of "the Market") than the other.

Barry Ritholtz, chief market strategist at Maxim Group, suggests, in a BusinessWeek Online interview, these folks may well have the causality reversed:

Q: How do you think the upcoming Presidential election is affecting the stock market? A: The markets are impacting the [race]. The capital markets act as a future discounting mechanism, anticipating economic conditions 6 months to 12 months into the future. Politics matters far less to asset managers than whether the economy is expanding or contracting. Markets may not always get it precisely right, but they come close enough that it's wise to pay attention to what they're saying.

I think this is clearly one of the implications of findings from such things as Ray Fair's model for predicting elections: it's not only asset managers for whom the economy matters more. I do think there is some circularity in the whole issue (not in Barry's argument). The markets may drive who ends up in the oval office, but aside from the folks doing the "heavy lifting", portions of those markets are driven by people investing based on who they believe will win (and thus are attempting to capture the best future returns based on their belief about who will be best for the market):

Conversely, when investors expect a slowing economy, which means weaker revenue and lower earnings, they become less willing to "pay up" for earnings. That's what we have seen since January of this year -- the markets became less willing to pay a premium for future earnings.

The difference, obviously, is that the people Barry mentions often have far better information than the average investor.

Since so many people "vote their wallets", it's no small issue. But this could be changing. This may be one of the few times an issue of foreign policy trumps the economy in November. More from Barry:

Q: So you think Kerry will win? A: Here's where things get tricky: Once all the quantitative data is in -- and assuming there's no "October Surprise" -- I look for an analogy with another, historically similar period. This includes economic data -- interest rates, taxes, unemployment, inflation -- as well as geopolitics.
What makes the 2004 election such a challenge to forecast is that we have never seen a Presidential term with a burst market bubble, a recession, a major terrorist attack on U.S. soil, a big tax cut, and not one, but two, wars. So without an analogous comparable, making a prediction with a high degree of confidence becomes quite problematic -- it's just a crapshoot.

If you won't let me weasel out of giving an answer, then I'll fall back on quant work. All four data points [from earlier in the article] suggest the incumbent gets defeated in November.

Posted at August 30, 2004 11:29 AM

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