The Macro Strategist

David P. Goldman

+1 917 915 2985

dgoldman@macrostrategy.com

The Obama Factor in the Stock Market

Monday, November 21, 2011
SUMMARY
No-one expected the Deficit Reduction Commission to produce anything but more
deadlock. Why should it take the stock market down? The trouble isn't in the Deficit
Commission, but in President Obama's improved election chances.
We rely on Intrade's odds-making rather than opinion polls, following research
indicating superior accuracy for auction markets.
Obama has benefited from a mediocre performance by the field of Republican
candidates as well embittered resistance among traditional Democratic
constituencies.
Rising taxes and widening deficits at the state and local level set up an
unprecedented kind of confrontation over budgetary issues.

Exhibit 1: S&P 500 vs. Obama's Probability of Re-Election

Obama's reelection chances

have improved
noticeably during
the past two
months,
weakening the
stock market.

Source: Intrade

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A National Referendum on Capitalism

Exhibit 2: Obama's Re-Election Probability vs. S&P 500 (Dec. 6, 2010 to
Present)

A bad stock
market and a bad
economy is bad
for the incumbent,
but it's not so
simple

Source: Tradeline

Over the life of the Tradeline.com bet on Obama's re-election since Dec. 6, 2010,
changes in the S&P 500 explain about two-thirds of the variation in Obama's political
standing. That's another way of saying, "It's the economy, stupid."
Of course, the question of causality remains. The Granger Causality Test (actually, a
statistical test for information precedence earned its inventor a Nobel Prize, and is
helpful in this regard.
Exhibit 3: Granger Causality Shows the S&P 500 "Causes" Changes in
Obama's Re-Election Chances, Dec. 6, 2010 through September 21, 2011
Pairwise Granger Causality Tests for Dec. 6, 2010 to Sept. 21, 2011
Lags: 3
Null Hypothesis:

Obs

F-Statistic

Probability

D(OBAMA) does not Granger Cause D(SP)

286

2.11339

0.09874

1.50361

0.21383

D(SP) does not Granger Cause D(OBAMA)

Source: Tradeline, Macrostrategy LLC

What the table shows is that the probability that the S&P does not contain information
about future values of Obama's re-election probability is higher than the reverse (the
2 The Obama Factor in the Stock Market

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double negative is a convention that emphasizes that statistics can falsify an

hypothesis but not prove a positive statement). That is just what we would expect;
the worse the stock market, the less popular the incumbent.
Something went very wrong in the middle of October. The Republican candidates failed
to cover themselves in glory, and the public embarrassment of Herman Cain and Rick
Perry did the party's image no good. As a number of prominent Republican consultants
have observed, the acrimonious tone of the televised debatesespecially Gov. Perry's
hounding of Mitt Romneysent the wrong message to voters. At this point Obama's
odds jumped from 46% (landslide defeat) to 51% (narrow victory), a gigantic margin.
And the stock market began taking its cue from politics.
Exhibit 4: Granger Causality Shows that Changes in Obama's Re-Election
Chances "Causes" Changes in the S&P 500, Oct. 15, 2011 through Nov. 21,
2011
Pairwise Granger Causality Tests
Sample: 10/15/2011 11/21/2011
Lags: 3
Null Hypothesis:
D(OBAMA) does not Granger Cause D(SP)
D(SP) does not Granger Cause D(OBAMA)

Obs

F-Statistic

Probability

38

1.06337

0.37880

1.63102

0.20229

Source: Tradeline, Macrostrategy LLC

As Obama's re-election prospects improved (from a low of 46% to today's 51%), daily
changes in the Tradeline wager predicted future movements of the S&P 500. This
could be exaggerated, to be sure: one has to dig deeply into the data to determine
whether this relationship holds water.
We can see a bit of this inverse relationship in a chart showing daily changes in
Obama's Tradeline numbers against changes in the S&P 500 lagged three days, as in
Exhibit 5 overleaf. But this is a case where statistical analysis uncovers relationships
that if not invisible to the, are at best ambiguous.

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2.5

80

2.0

60

1.5

40

1.0

20

0.5

0.0

-20

-0.5

-40

-1.0

-60

-1.5
2011M10

-80
2011M11
Changes in Obama's Chances (3 Day Lag)
Changes in S&P 500

Source: Tradeline, Macrostrategy LLC

Why should the Super-Committee stalemate rattle the markets?

Exhibit 6: The Growing Tax Burden

No accident that
the deficit is the
hot-button issue

Source: Census Bureau

4 The Obama Factor in the Stock Market

Daily Changes in S&P 500

As Obama goes
up, stocks go
down since midOctober

Daily Changes in Obama's % Change of Re-Election

Exhibit 5: As Obama Goes Up, Stock Market Goes Down

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It focuses attention on an unprecedented polarization of economic interests. The tax

burden on the middle class has been increasing throughout the recession, more at the
state and local level than at the federal level, as Exhibit 6 makes clear.
The middle class worries that the tax burden will destroy its remaining wealth.
Exhibit 7: The Worst Burden Falls on Property Taxes: Property Taxes as a %
of State and Local Revenues

For many
homeowners, the
property tax has
become a
confiscatory
wealth tax

Source: Census Bureau

Exhibit 7 above shows that property taxes have risen from about 29% of total state
and local revenues to about 35% today. What that means in practice is that the
average homeowner who can refinance a mortgage at today's low rate with a 20%
down payment will pay about as much in property taxes as in mortgage interest. That
is a striking result; property taxes a decade ago amounted to a quarter to a third of
mortgage payments.

5 The Obama Factor in the Stock Market

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Exhibit 8: Property Tax Payments vs. Mortgage Interest Payments, US

National Aggregate (Assumes 20% Down 30-Year Fixed Mortgage at Current
Rate)

The whole impact

of lower interest
rates has been
reversed for
home-owning
households

Source: Census Bureau, Macrostrategy LLC calculations

Exhibit 7 above shows that property taxes have risen from about 29% of total state
and local revenues to about 35% today. What that means in practice is that the
average homeowner who can refinance a mortgage at today's low rate with a 20%
down payment will pay about as much in property taxes as in mortgage interest. That
is a striking result; property taxes a decade ago amounted to a quarter to a third of
mortgage payments.
This extraordinary observation is the result of continuous upward creep of property tax
assessments despite the collapse in home prices. As home prices soared during the
mid-1980s, tax assessments lagged; now that they have collapsed, local authorities
continue to press for higher assessments. It is easier to boil the frog by slow
increments of property tax assessments than to go to voters with a new sales or
income tax.

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Exhibit 9: Property Taxes Rise While Housing Prices Crash

The middle class

feels like a boiled
frog

Source: Census Bureau, S&P

Eleven U.S. states, meanwhile, face budget deficit this year that exceed 16% of total
projected revenues, ranging from Nevada (at 37%) to Illinois (at 16%). If states
cannot raise new revenue from the middle class, they will have to cut spending
severely, which means re-negotiating pension and benefit packages for public sector
unions. The middle class is danger of losing its savings, its retirement and in many
cases its homes as property taxes rise; public sector employees are in danger of losing
benefits they negotiated during the bubble years and believed to be ironclad.
Never before in American history have so many Americans depended on the public
budget, and never before has the property tax threatened to become a confiscatory
wealth tax. This energizes a kind of polarization we never seen before, and a different
kind of politics. It makes all the standard predictions of electoral outcomes less
certain. And as long as the Republican Party's leadership appears uncertain, the
prospect of another four years of Barack Obama will weigh on the equity market.

7 The Obama Factor in the Stock Market