Friday, October 17, 2008

Two Bull Markets

Greg Mankiw:
In the midst of all the extraordinary asset price movements we have seen of late, here are two that particularly stand out. The VIX index, which measures expected stock market volatility, remains near all-time highs. So does the probability at Intrade that Obama will be the next president, which now stands at 85 percent.

Is the apparent comovement in these two series a coincidence? Probably not. All the recent bad news about the economy has been good news for investors who are long volatility or long Obama.
The question is -- which trend is causing the other?

1 comment:

thinking said...

There is no way that one can believe that Obama's rise in political fortunes is somehow influencing the economy in such negative ways.

Obviously, as the economy has worsened, that has strengthened Obama's position.

To suggest the other way is to veer far off the mark.

We know the causes of the markets going down...they are in the headlines every day. There's no mystery there. When we read about credit markets freezing up, big financial companies about to go under, economic indicators all pointing dramatically downward, etc...we don't need to search for some other reason.

Also, markets have never reacted so much to election probabilities.

Finally, let's lay to rest the myth that markets fare worse under Democratic presidents than under Republicans.

The NYT published a cool piece showing:

Since 1929, Republicans and Democrats have each controlled the presidency for nearly 40 years. So which party has been better for American pocketbooks and capitalism as a whole? Well, here’s an experiment: imagine that during these years you had toinvest exclusively under either Democratic or Republican administrations. How would you have fared?

As of [last]Friday, a $10,000 investment in the S.& P. stock market index* would have grown to $11,733 if invested under Republican presidents only, although that would be $51,211 if we exclude Herbert Hoover’s presidency during the Great Depression. Invested under Democratic presidents only, $10,000 would have grown to $300,671 at a compound rate of 8.9 percent over nearly 40 years.

So the markets should be cheering the prospect of an Obama presidency.