Election Politics or QE2?

Over the last few days, the Intrade pay-to-play investment exchange shows the contract for Democratic control of the Senate dropping below 50 percent for the first time. In fact, as of this writing, the contract is at 46 percent. For perspective, the contract was 95 percent in early 2010. Last summer, it was 75 percent.

And here’s what’s so interesting to me: Since late August, as the contract for Democratic Senate control dropped from 75 percent to its current 46 percent, the Dow Jones Index has basically risen from 10,000 to 11,000. Coincidence? I don’t think so.

The investor class has already discounted Republican House control. But not until recently has the stock market begun to think about a full-fledged Republican sweep of both houses of Congress. That gives more credibility to “stopping the bad stuff” — to use John Boehner’s phrase — meaning a freeze on the Bush tax rates and hopefully spending and over-regulating. That would be very bullish.

Now, I know many market commentators attribute the stock market rally to Ben Bernanke’s QE2 effort to once again pump up the money supply. More free money means higher stock prices according to this group. But as usual, these folks ignore the plunging dollar and soaring commodity prices, which will lead to an inflation tax on consumers and businesses, something that is not good for profits or economic growth.

The debate between election politics and QE2 will go on. Which is a bigger influence on stocks? I still think the election is everything right now.

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