What do the Markets Have to do with the Election? Not Much

Barry Ritholtz of the Big Picture also writes a column for the Washington Post.  One of his latest columns in the post has to with how markets react to election or better yet how they do not react to the markets.  People are constantly looking for correlation between two variables and how they move together.


The biggest driver (and I have pointed this out before) to who wins the election in November largely has to do with how the economy performs.  If the economy takes off then Obama is likely the winner.  A tanking economy would give the GOP nominee (likely Romney) a leg up.  An economy that muddles through between now and the election likely makes for a tight election which could go either way.


Here are a few take aways from Barry's column

• In a word, no. Markets do not rally or sell off because one candidate or the other is more likely to win. This might strike some as a bit radical, but here it is: Markets don’t give a flying fig about any of this nonsense.
• Most of the time when an incumbent is doing well in the polls, it is because the economy is doing well enough (or improving fast enough) that it is generating solid corporate earnings, strong hiring and positive consumer spending. That not only drives stocks and markets higher, but also makes voters feel economically secure. This works to the advantage of the sitting president. Note that the opposite is also true: Markets do not do poorly because the challenger is polling well; rather, the conditions that help a presidential challenger obtain victory — weak job availability, unhappiness with the economic conditions, desire for change — are negatives for earnings and the markets.
• Large hedge funds and high-frequency traders are the biggest participants short-term. The machine-driven mathematical traders have no interest in politics; their stock purchases are held for milliseconds, and their buying is driven by quantitative formulas that have nothing to do with any candidate. Hedge-fund managers certainly are not making bets dependent on the outcome of elections 10 months hence. They are more concerned with monthly, weekly and even daily performance. The technical factors driving what they do are far removed from whatever is happening on the campaign trail.
• The underlying conditions that lead to strong equity markets — robust growth, job creation, brisk consumer spending, income gains, tame inflation, etc. — also work to aid the incumbent. It is not that markets like incumbents, it is that both markets and incumbents do better when the overall economy is doing well.
• Putting the day-to-day noise into the larger context of quarters and years will help make you a better, smarter investor.