UPDATE (06 November 2008): This missive has been updated from its original publishing. The chart in this missive has been replaced with three more up-to-date charts reflecting current polling figures and market values. (Click here for more information on post election markets)
LONG BEACH/ATLANTA— The current stock market unrest reflects a pervasive fear of the future in the US economy. Further, Barack Obama is leading in the polls, and is leading substantially in some. But how does Mr. Obama’s rise correlate to the volatility in the stock market? Does his rise in the polls mean people are turning to him as a result of the volatility? Or does the volatility in the market mean investors are concerned about Mr. Obama’s rise in the polls?
Much has been written about what impact the Obama tax hikes on capital gains, corporations and wage earners earning over $250,000 may have on the American economy. I personally speculate that Mr. Obama’s tax plans will put quite a damper on the market and will slow recovery from the current recession (and thus I’m not voting for him!). But I readily admit that this is all an academic debate at this point- we will not know for sure until Mr. Obama is elected and enacts his plans.
Some speculate that the current volatility in stock market prices confirms that investors have similar perceptions of Mr. Obama’s plans. They dub the current depressed market as reflecting the “Obama Discount.” Markets generally reflect investors perceptions about the prospects of the economy in the upcoming 6 to 9 months. With stocks slumping, those perceptions must not be good. Some suggest that the stock slump directly correlates to the rise in Mr. Obama’s polling numbers. They argue that the slump reflects a general fear among investors that Mr. Obama’s policies on taxes, labor unions, energy consumption surcharges, and expanded regulation (among others) will be a burden on economic recovery.
But is the “Obama Discount” true? Clearly, the overarching concern impacting the stock market is that we are in the midst of the worst financial crisis since the Great Depression, with much uncertainty abounding. There is no doubt that this is the primary driver of the uncertainty and volatility.
Nonetheless, the market’s movements are not fully making sense. Major governments have moved swiftly to inject capital into the markets and credit is thawing (ever so slightly). I have argued previously that government movements into the economy may be exacerbating market anxiety, but the conventional wisdom is that these movements are addressing investor concerns about available liquidity and thus stocks should stabilize.
But the conventional wisdom is not happening. The Dow is still dropping considerably, even among companies who offer low priced goods and would seemingly benefit during a downturn (companies such as McDonald’s and WalMart). Supporters of the Obama Discount theory suggest that this unexplained movement confirms investor concerns about the US economy under Mr. Obama.
To test this theory, we created the graph below, comparing the movements in the polls to the movements in the Dow Jones Industrial average.
CLICK HERE For The Graphs. They will amaze you.
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