What do the markets have to do with the election? Not much.
Barry Ritholtz
Washington Post, January 15 2012


Just about this time every campaign cycle, the pundits get all excited about what Mr. Market is saying about the election: What does this candidate or that mean for the stock market returns? Will an incumbent victory bode well or poorly? Are stock prices telling voters which candidate will be friendlier to future market returns?

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.

First, consider the classic “causation/correlation error” — one that pundits make all the time. This occurs when two factors happen at similar times, and an assumption is made that one is causing the other. Correlation errors confuse cause and effect. Typically, a more significant but overlooked factor is driving the outcome.

Here is a classic example: “The incumbent’s poll numbers are rising, and the S&P 500 likes it. It has been rallying in response.”

Not exactly. There is a third explanation, and understanding this requires thinking about what is common to both incumbent polls and stock markets. Instead of assuming that one is causing the other, we need to look for broader forces that are driving both elements.

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.

Don’t expect to hear this straightforward reasoning from the punditry. During the silly season, politicos and cranks push all manner of sophistry and ignorance onto an unsuspecting public. We’ve seen it in the editorial pages, from guests on my pal Larry Kudlow’s show, and all over the intertubes. Too many folks blame every twitch of the market as a reaction to the politician they like or dislike the most.

The shorter-term swings are especially nonsense.

Let’s consider what is driving day-to-day stock prices: It’s not expectations about changing capital gains taxes or broad shifts in health-care spending — issues that arguably can be game-changers in elections.

Rather, 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.

These simple facts never seem to get in the way of the op-ed writers at various journals who seem to favor arguments along these lines: “Worries about possible policy changes are weighing on markets ahead of the year’s presidential elections. Candidate X’s rise in the polls is a risk that is giving the stock market jitters. Stock prices are wobbling, all leading to uncertainty. (And the markets hate uncertainty.)”

This analysis — to use the word loosely — is misleading and flawed. Investors should avoid misconstruing information from polling and extrapolating it toward markets. Here are some other arguments to watch out for:

Misplaced credit and blame: Presidential blame and credit for the markets is greatly exaggerated. The U.S. chief executives get far more credit than they deserve for good markets, economies and business cycles. They also get more blame when the economy is weak than is reasonable or fair. This is true regardless of which party wins the White House, or where the economy is in its cycle.

The Obama bull market: Perhaps you don’t buy my arguments. Then you must obviously be rooting for an incumbent victory. Why is it that? Consider how the markets did under George W. Bush, the most recent “pro-business president.” Then imagine how markets probably reacted to the anti-business socialist from Kenya.

I have some disappointing news those of you who believe in such utter silliness: The S&P started at 850 the day Obama was sworn in; last week it hit 1292 — a better than 50 percent gain over three years. (If that’s anti-market, I’ll have some more, please.) In 2001, when Bush was sworn in, the S&P stood at 1343. He left at 850 — a decline of about 37 percent.

If you buy into the foolishness that presidents drive markets, than given his giant stock gains, Obama is your guy.

Anthropomorphizing markets: Politicos make another analytical error in the language they use: Markets “prefer” one candidate over another; polls are validated by short-term rallies; a disliked candidate’s latest stump speech is what drove the last sell-off. It is a trick used to frame issues, and it is disingenuous at best. Indeed, with these silly claims, pundits manage to combine all of the analytical errors discussed above.

Perhaps it helps to think of markets as future discounting mechanisms. Whenever an economy is slowing, markets price in the possibility of worse profits and sales. (My experience is this occurs three to six months in advance.) Markets are imperfect, subject to excesses of crowd behavior, but they get the big picture correct eventually. When the economy is improving, you will see that reflected in improving stock prices, often in advance of the stronger economic data.

Weak job creation and slow sales both affect equity prices, the electorate and the incumbent party’s election fortunes. When folks are content with the status quo and feel secure in their financial futures, they vote for more of the same; when they are not, they vote for change. Thus, the cause is the weakening economy and its discontents thereto. The effect is the rise of candidates claiming to be change agents — and the fall of those representing the status quo.

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.


Ritholtz is chief executive of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. Twitter: @Ritholtz.

Category: Apprenticed Investor

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

12 Responses to “What do the markets have to do with the election? Not much.”

  1. Greg0658 says:

    disagree abit – maybe markets don’t care – but main street and individual small businesses do – it matters

  2. theexpertisin says:

    An excellent, thought-provoking article.

    Regardless of who is President, business leaders will adjust to navigate the politics of the times.

    Buffett and Immelt are prime examples.

  3. VennData says:

    Reversing this non-tautology, hopefully the tax take DOES have something to do with elections…

    “…Despite “the New Jersey comeback” that Gov. Chris Christie boasted of in his State of the State message on Tuesday, the state released figures today indicating that the state’s economic recovery is falling short of expectations…”

    “…The figures were released less than 24 hours after Christie proposed an across-the-board 10 percent reduction in the state’s income tax rate. He said today that the tax break would cost the state $300 million each year over the three years in which the cuts are phased in, beginning Jan. 1, 2013…”


    More evidence that Supply Side “Economic”s a) doesn’t work b) the fact that it doesn’t work, doesn’t deter Supply Siders from ramming through budget busting tax cuts for the rich.

    Supply Side Economics: magic beans for the GOP Media Machine to jack your beanstalk.

  4. VennData says:

    Republican Primary in South Carolina Is Down to the Wire

    “…Newt Gingrich, who has surged in opinion surveys, delivered two feisty debate performances in South Carolina this week that appear to have acted as a siren to the party’s base…”


    Yelling, shouting and reading from the Palin-blame-the-media script reveals the corner the Tea Partiers have painted themselves into with their loony attack of everything Obama does, no matter what…

    …all these poor white victims are left with after a felicitous, Big-Lie marketing program…


    … resulting in the quiet forgetting of the Bush Ownership Society policies that drove the financial system out of control, the tax cuts for the rich that left us unable to readily finance its repair… the endless war footing ….and filled their Tea Partying hearts with out-of-proportion feelings about quotas, gay marriage, and the ‘welfare state’ Obama ushered in out of nowhere.

    What the pundits don’t grasp is the Tea Party and the Paulites hate Romney BECAUSE he’s successful. Romney is emblematic of the straw man the GOP Media Machine loves to bash: effete gov’t-solutions, urbane problem solving, smart, successful …an Olympic “Community Organizer” of Massachusetts proportion.

  5. constantnormal says:

    I tend to believe that while the markets may not care who is elected, the mere fact that the election takes place has an impact on the economy, and thus (albeit rather distantly) an impact on the markets. Pols are loathe to levy any harsh rules or taxes of any sort whilst their re-election lies ahead of them.

    Hell, even pols who are running unopposed will spend money on TV spots (case in point, Senator Lugar (R) of IN) that laud their accomplishments, slathered in the usual and customary amount of bs … one has to wonder why?

    And then there is the impact of 500-1000 pols around the nation pouring ginormous amounts of campaign spending into the economy, benefitting firstly the media hacks, but greasing the wheels of any/all who might conceivably be able to ensure the continuation of the incumbents’ decades at the trough of public finances. Obama alone is said to be working toward raising a billion dollars, most of which will be spent.

    In some sense, this is a positive thing, as few other events could pry loose this much coin from the pockets of the 0.1%, recirculating it back into the economy, at a much lower point that their usual purchases of expensive cars, paintings, and high-priced wines and stratospherically-priced real estate around the globe.

    So at least in some measure, the elections have something to do with the markets … I think.

  6. formerlawyer says:

    So if I hear you correctly: The stock market is not the economy, the “market” is not a person and when measures of economic fundamentals are changing – the market might change in advance. The economy drives the electorate and vice versa but there is very week correlation between the market prices and polling numbers so much so that it can be dismissed as being no-causal?

  7. Futuredome says:

    Markets will have a major problem with this election since both parties probably want to lose, especially Democrats who are probably focused on the 2014-16 elections as the economy isn’t going to “boom” for awhile.

    Nobody wants this election. It why the Republicans can’t get a nominee. Whoever wins will take the fall in 2016.

  8. jasmanak says:

    I was living and working in India during the mid to late 90′s and observed the extent to which a lot of young entreprenuial types of people were drawn to Bill Clinton. He seemed to have a capacity to speak in a style which engendered inclusiveness even beyond the borders of America. Obviously a lot of other things were happening concurently like the the high tech explosion and economic liberalization in places like India but it is my feeling that Clinton through his rhetoric, which was backed up at times through concrete policy initiatives, contributed to an optimistic vigour worldwide which abetted the high tech phenomenon during this period. Quite honestly, I don’t know how much his actual policies directly contributed to this boom, but his abilty to connect positively with people around the globe, in my opinion served as a catalyst. It’s to this extent that at time s sheer force of personality can influence momentum in a trend already in place, assuming one has the ability to pull it off, like a Bill Clinton.

  9. GB says:

    @constantnormal you make a considered argument, and the logic makes sense. But one of your examples (re Lugar re-election) doesn’t ring true. Despite Lugar’s wide support in the senate, he is under real pressure from an insurgent tea-party candidate in the GOP primary. Maybe you have a better example of an uncontested election contributing to the economy just for the heck of it?

    A quick comment on the article: to some extent, even a CEO appointment is disregarded by the market over the medium-term. His job, among many others, should be to set the vision, and create a platform for the business to grow and increase profitability. That takes time. The market will discount the success of those initiatives when success becomes likely, not before. In a way, we elect government to set the vision and infrastructure of the country, which may (or not) bleed into the economy in future; but who knows. The correlation argument sounds more likely than a valuation argument.

  10. The Stock Market Loves Obama

    It’ll be tough for the Obama haters to argue against this juicy little nugget.

    The Dow Jones Industrial Average has surged 60% since Barack Obama was inaugurated as president three years ago, according to research firm Bespoke Investment Group. This means President Obama is one of only five presidents that have witnessed the blue-chip index surge more than 50% during their first three years in office.

    The best return came under FDR, when the stock market surged a whopping 190% during the first three years of his term. Stocks also rallied 60% during President Eisenhower’s first three years and 60% amid the same time frame for Bill Clinton.

    Now we’ll admit here at MarketBeat that there are many caveats that go into this data. There is also a definite distinction between correlation and causation that must be highlighted.

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