President Obama will hold onto the White House if the S&P 500 remains above 1,200 until Americans go to the polls according to Paul Dales, the senior U.S. economist at Capital Economics.
“The close relationship between President Obama’s chances of re-election and the level of the S&P 500 appears to suggest that the stock markets favor a Democrat as President,” said Dales in a research note before Obama’s keynote speech at the Democratic convention.
It is important though not to confuse correlation and causation according to Dales, who says Obama’s re-election chances, like the S&P 500, are being driven by the economy.
“Obama’s election chances and the S&P 500 are actually both being driven by the incoming news on the health of the economy. Nevertheless, based on that correlation, we would expect Obama to be re-elected as long as the S&P 500 remains above 1,200,” said Dales
With futures contracts pointing to a 58 percent chance of Obama being re-elected, Dales said the market may actually be cheering the president on. (Read More: Obama Good For Business: Carmax Car Founder)
“In contrast to the conventional wisdom, investors actually seem to prefer having a Democrat as President. The correlation would seem to have a lot more to do with Obama being the incumbent, however, rather than the fact that he is a Democrat.”
Economic data before America goes to the polls will be crucial with this Friday’s jobs data likely to set the tone for the last two months of campaigning.
“At first glance, the latest Gallup poll on Romney versus Obama suggests the election is too close to call,” Jim O’Sullivan, the chief U.S. economist at High Frequency Economics said on Thursday. (Read More: Romney, Obama Hit Battle Grounds Running)
“However, as Al Gore knows, U.S. Presidential elections are not determined by the popular vote, they are determined by the 538 electoral votes allocated among states,” said O’Sullivan in a research note.
With the Republican National Convention failing to boost Romney’s poll numbers some expect Obama to regain the White House, while the Republicans hold onto the House and the Senate.
“Split power in Washington will make decision making challenging,” said O’Sullivan, who expects the cuts in fiscal policy to be delayed well into 2013.
“That leaves lots of uncertainty on what exactly will happen; there is also plenty of uncertainty on the impact this uncertainty will have.”
Paul Dales believes equity markets don’t like uncertainty and says a victory for Obama would mean investors would know what to expect.
“What would actually be good for the markets is if one party controlled the White House and both Houses of Congress, as that would improve the chances of breaking the deadlock on producing a credible medium-term plan to reduce the budget deficit,” said Dales.