Is This the Start of the Worst Pre-Election Scenario for the President?
If you have seen the polls in recent weeks, you are aware that President Obama has been putting a comfortable gap between himself and Mitt Romney. So large that Intrade is now giving the President an almost 75 percent probability of winning (see below). The main stream media is abounded with explanations ranging from the conventions to character traits. However, if you are a longer term reader of Exabyzness then you know that I often equate the swing in the voting polls to the swings of the market. Indeed, most voters don’t have the time or skill to analyses the entire economy so they often, wrongly, equate that task to looking at the performance of equities. “If stocks are going higher, something must be working” is a common theme. Of course the market and GDP are not at all the same thing given how much of corporate earnings are now derived from overseas, just to name one reason.
Stocks have melted higher in recent weeks and so followed the polling data in favor of President Obama. However, there have been some occurrences this week that when paired with the timing could be considered a worst nightmare for President Obama if you accept the market/economy swing vote thesis. First, problems in Europe are starting to pop back up in the news. There was a long period of quiet since they announced their last great plan to save the EU in the form of the OMT but that is changing quickly. Indeed, there is now a political crisis in Spain which causes the markets to lose faith in a country’s speed and ability to adapt to financial troubles. This fear sent Spanish market down over 3 percent Wednesday. Also Greece is back in the media as riots broke in Athens as angry citizens protested further austerity. Despite yesterday's rebound, this put negative pressure on U.S. equities for the majority of this week. Continued downward pressure on equities would be the second occurrence that is a negative for the President’s reelection hopes. Stocks have had a miraculous levitation higher off the summer lows despite mundane economic data highlighted by a weakening employment situation. The rally is mainly thanks to the actions of the Fed and the FOMC. More and more people on Wall Street are certain that this can’t last and whatever positive hopium the longs are still holding onto is possibly fading. Given the pressure on the markets so far in this post option expiration week, equities have already given up all of the gains since the Feds announcement of QE3 (see below), although recovered most of this Thursday. Considering that stocks are still at these elevated levels but the troubles in Europe are starting to come back into play and market pundits are already starting to claim that QE4 and jokingly QE Infinity are needed it seems likely that the party that has been risk assets for the past few months may ready to take a breather. With the speed at which market corrections, even the healthy ones, play out, this could be happening at the worst possible time for the President.
Source - Exabyzness