Electionomics

[David Farber <dave () farber net>]

Begin forwarded message:

From: Barry Ritholtz <ritholtz () optonline net>
Date: August 30, 2004 2:15:28 AM EDT
To: Dave Farber <dave () farber net>
Subject: Electionomics

THIS EMAIL IS NOT FOR PUBLICATION


Hey Dave,

I don't want to submit my own Business Week interview to IP -- but I  
thought this would be of interest to you personally.

I don't love they way they cut & pasted my answers together, but its  
not bad  . . .

Its based on "Confusing Cause & Effect"  
(http://bigpicture.typepad.com/comments/2004/07/confusing_cause.html)  
work from last month.

Here's a short excerpt:




Electionomics
Is the Presidential race roiling the markets? Or are the markets  
roiling the race?
http://www.businessweek.com/bwdaily/dnflash/aug2004/ 
nf20040830_5077_db049.htm



Q: Who do you think will win the election?
A: I'm a numbers geek at heart, so I watch four quantitative factors  
that have had a strong historical correlation with incumbent electoral  
victory, regardless of party. The first is job creation, second is  
Presidential approval rating, third is percentage saying the country is  
going in the right or wrong direction, and the fourth is the Dow Jones  
industrial average performance in the first half of the election year.

The polls are saying this is a very close race, but all four of the  
above data points suggest the incumbent is in deep trouble. Over a  
four-year term, when job creation is less than 5%, studies have shown  
it's a huge negative for the occupant in the White House. As of last  
month, we were at a negative 0.8%.

We see recent surveys showing the incumbent polling less than a 50%  
job-approval rating, and for the "right/wrong direction" question, only  
36% are answering "right direction." These are big negatives. The Dow  
started the year at 10,450. It has come up off the lows but is still  
down for the year. It's a minor negative.

Q: So you think Kerry will win?
A: Here's where things get tricky: Once all the quantitative data is in  
-- and assuming there's no "October Surprise" -- I look for an analogy  
with another, historically similar period. This includes economic data  
-- interest rates, taxes, unemployment, inflation -- as well as  
geopolitics.

What makes the 2004 election such a challenge to forecast is that we  
have never seen a Presidential term with a burst market bubble, a  
recession, a major terrorist attack on U.S. soil, a big tax cut, and  
not one, but two, wars. So without an analogous comparable, making a  
prediction with a high degree of confidence becomes quite problematic  
-- it's just a crapshoot.

If you won't let me weasel out of giving an answer, then I'll fall back  
on quant work. All four data points suggest the incumbent gets defeated  
in November.

Q: Doesn't Wall Street typically prefer Republican Presidents?
A: Ideally, the Street prefers a divided government: The best stock  
markets of the past three decades have been under Presidents Reagan and  
Clinton. Reagan was a Republican with a Democratic Congress, while  
Clinton was a Democrat with a Republican Congress.

Gridlock works because it forces both sides to the middle. Pragmatic  
moderation is an effective economic policy. Hard-core ideological  
approaches tend to be disastrous.


The full piece is here:
http://www.businessweek.com/bwdaily/dnflash/aug2004/ 
nf20040830_5077_db049.htm





Cheers,


Barry L. Ritholtz
Chief Market Strategist
Maxim Group
britholtz () maximgrp com
(212) 895-3614
~~~~~~~~~~~~~~~~~~~~~~~~~~~~
The Big Picture:  A blog of capital markets, geopolitics, with a dash  
of film!
http://bigpicture.typepad.com/comments/ 

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