Is the market reacting to the incumbent’s chances?

Nothing like a little political discussion to spice things up on a rainy Saturday morning.

In an attempt to add some empirical facts to a highly emotional issue, Bianco Research has been tracking the relationship between the S&P and Transport.com’s Bush reelection futures, and has concluded they’re symbiotic.

I disagree.

Bianco notes, via Aaron Task of the TheStreet.com, the following (dubious IMHO) relationship:

“A couple of interesting things – Bush has always been above 50% in this [futures] market, which belies some of the polls that we’ve been seeing lately,” Bianco wrote on June 30. “This market has always thought Bush was favored. …from August 2003 to the high in January 2004, as Bush futures went to 75 briefly, the stock market was moving up over the same period. …as Bush futures declined from 75 to 53, the stock market went sideways. Since January, the biggest rally in stocks has been the current rally of the last three weeks or so. The biggest rally in Bush futures since January has also been in the last three weeks or so [again this is of June 30]. These things might not be unrelated. The stock market might want Bush to win, and may be keying off of Bush’s re-election chances.”

Here’s Bianco’s chart; Note that my own annotations are in Purple.

My response:

Jim Bianco makes an interesting but highly tenuous (specious, even) argument, for oh-so-many reasons. The first is that markets, being highly complex systems which seem to operate based upon same the principles which govern Chaos theory, are simply too multi-faceted for any single factor to dominate — at least beyond a short period of time.

Second, the President’s futures peaked way before the market did — but in other instances, the futures hardly led. At best, they may be a lagging indicator — and just one of many.

Third, an economic reality: all Presidents get far more credit and more blame than they deserve, at least when it comes to economic performance. The business cycle and the Fed Chair have alot more to do with the economy than the President does. (An argument can be made that in the present case, some of the economic policy decisions The Prez made are having their impact — they were stimulative of some sectors, but not others, and perhaps now the stimulus is fading).

Lastly, markets get it wrong — and quite often. I know this is a scandalous assertion to some, but sorry, I believe it to be true. Mr. Market was wrong when Nasdaq was at 5,100, and he was wrong in Oct ’02 at 1,100. The 4 false rallies since the crash were “wrong,” at least in terms of predicting a recovery.

I addressed how wrong prediction markets can get Iowa and Prediction Markets, which had Vermont Governor Howard “I have a scream” Dean as a sure thing in the Dem Primary.

So much for that prediction . . .