Kevin Spires, CFA, FRM

Obama's reelection odds at www.intrade.com took a slight hit with the announcement of Paul Ryan as the vice-presidential choice for Mitt Romney, but held steady through the Republican convention.  The odds stand at 56.7% heading into the Labor Day holiday and the Democratic Convention next week.  The election season will take off in earnest next week and the next 60 days should be interesting to say the least.

I believe that this election will have profound effects on financial markets over the next 5-10 years.  An Obama reelection will lead to a consolidation of the massive advances that Central Planning has made over the past 10-12 years (Yes, the Bush Administration saw a number of advances for Socialism, including the Medicare Prescription Drug Program, No Child Left Behind, TARP, the creation of Homeland Security and the TSA, and the appointment and reappointment of Ben Bernanke - the most interventionist Fed Chairman in the history of the Federal Reserve). 

In the medium term, more government equals less growth.  Over the course of a
decade, this will pass through to less corporate profits and lower returns to equities.  I would lower my average 10 year real GDP growth rate expections from 2.75% to 2.00% based on a consolidation and continuation of the past decade's growth in the Federal Government.

While the www.intrade.com election odds of President Obama are below their recent highs, they are still holding above 50% at 57.6%.  I fully expect this election to be tight up to the end.

With the S&P 500 (represented in the chart by the SPY ETF) approaching cycle highs, President Obama's reelection odds are back up to 58%.  Since the start of 2011, Obama's reelection odds have a 73%+ correlation to the SPY.

A strong stock market is a plus for Obama at this stage of the election.  If the S&P 500 is the best indicator of the economy's performance, then President Obama is a decent favorite to win reelection over Mitt Romney.

With the advance release of Q2 GDP, it is a good time to review Yale Professor Ray Fair's two party vote prediction model.  While Professor Fair hasn't yet updated his page with the Q2 GDP results, you can input values into his model at this link and calculate the expected vote share for President Obama.  Fair's model uses mostly economic inputs such as Real GDP growth and inflation to predict the expected vote split between the two main parties.  The incumbent's party gets the blame for bad data and the credit for good data.

Using third quarter GDP of 2.5%, Fair's model generates a vote total of President Obama of 48.57% and 51.43% for Mitt Romney.  A close, but clear win for Romney appears likely at this point.  If the third quarter should happen to see a drastic reacceleration in growth - to say 3.5%, then the vote total expectation would be close to 50/50.  To say the least, a lot is hinging on the next 6-8 weeks of economic data.

The odds that Obama would be reelected (from www.intrade.com) and the Equity markets have been positively correlated - following the whole idea that reelection campaigns are referendums on the incumbent's (Obama's) job performance - specifically with regard to issues like unemployment, inflation and wealth creation. 

In the chart to the left, the odds of Obama's reelection have a 75% correlation to the price of the SPY - which seems to validate that a decent economic environment would increase Obama's odds, while a poor economic environment would decrease Obama's reelection odds.  I think the election is too close to call and will turn on the next quarter of Economic data.

With the Obamacare court decision in the books, the win for Obama on the upholding of the Affordable Care Act is resulting in a slight bump in Obama's reelection odds at www.intrade.com to 55.8%.

According to www.intrade.com, the odds of a Democrat winning the 2012 presidential election are currently 54.5%.  This year's election is going to go down to the wire.  With so much riding on the outcome, I expect each party to pull out all the stops to get their guy across the finish line with a victory.

From www.intrade.com, The probability of the Democrat winning the presidential election is 53.8%.  This is a bit higher than the Probability of Obama winning reelection as there is a non-zero probability (according to intrade) that Hilary Clinton wins it all.

Kevin Spires, CFA, FRM

President Obama's reelection odds have taken a hit over the past couple of days - dropping to 54.1% at www.intrade.com.  Q1 GDP was revised down to 1.9%.  Only 69k jobs were added in May and the Unemployment rate ticked up to 8.2%.

More ominously, the S&P 500 is down 10% from its recent highs - dropping back below 1300.  Obama's reelection odds have been positively correlated with the stock market and the recent drop has clipped 6-7% off his reelection odds.

Its the Economy stupid is always the best way to view the presidential election and as the best indicator of the Economy, I will be paying close attention to the stock market between now and election day.

The www.intrade.com odds for the reelection of President Barack Obama have been holding fairly steady at 60-62% the past 2 months.  Over the past week, with the Stock Markets down 7-8%, Obama's reelection odds have been down every so slightly - dropping below 60% to close at 58.4% last night.

There is a 78.4% correleation between the Obama reelection odds and the price of the SPY (S&P 500 Index) ETF since 1/3/2011.  As the Crazy Cajun would say "Its the Economy Stupid!" 

It will be interesting to watch if this correlation holds as we get closer to the election. 

Kevin Spires, CFA, FRM