Stock Prices, Presidents and Recency Bias
I’m not sure whether to laugh, cry or throw this in the “dataming” bin. The chart below comes from Lars Christensen’s blog. It shows the S&P 500 vs the re-election odds of President Obama. As you can see, the correlation is extremely close. Now, Mr. Christensen is a market monetarist and they’re pretty fond of the idea that stocks can create a “wealth effect”. He also implies in this post that stocks accurately represent the economy:
“This is the real-time version of James Carville’s famous dictum “It’s the economy stupid”. It is not a forecast on the election outcome – as I have no clue where the stock market is going in the coming weeks, but it is an illustration that TV debates are much less important than how the economy is doing.”
I personally don’t think stocks are an accurate reflection of the economy or that there is any supposed “wealth effect” from equity price increases. On the latter point, equity prices are merely nominal paper gains. To live your life based on these gains (which only a very small portion of the population does) is to put the cart before the horse. That is, this nominal wealth exists on paper, but is not real until the gains are realized. For most of us, that means we’re counting our chickens before they’ve hatched. On the first point, I’d only repeat my belief that stocks are essentially the summation of a bunch of guesses from inefficient participants with totally inadequate information.
But the strangest part in all of this is that human beings suffer from such a horrible case of recency bias that we can’t seem to see past the last stock quote we last saw on Yahoo Finance. This isn’t a knock on Obama. He’s performed OKAY in a pretty tough environment (though disappointing in my book for various reasons). I just think it’s another case of inefficient humans at work assuming that a better stock market today means the world is a better place. It’s almost like all these people making that assumption just went and missed the fact that capitalists, being capitalists, have responded to the weak economy by notching up record profits in large part by firing the very people who helped boost their profits (ie, they fired so many workers that their profit margins went through the roof)….Oh, the irony!
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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It looks like Obama’s got this one in the bag after tonight.
Most people get the causation backwards — see this:
“What do the markets have to do with the election? Not much.”
http://www.washingtonpost.com/what-do-the-markets-have-to-do-with-the-election-not-much/2012/01/12/gIQAPygezP_story.html
I thought it was the Washington Redskins that control the fate of the election?
Being a Skins fan, I can confirm that the only thing the Redskins control is the amount of money they waste on big names every year.
that kid you have at qb sure is looking good though
Cullen – watch the debates on CNN where they have the real time opinion tracker – the “+” goes through the roof whenever debt or deficit is mentioned as a problem. So I’m not sure we can trust what either candidate says about it since it is clear that it is smart to say what Romney did last night, that “we’re on our way to becoming Greece”…. voters eat that up. And from my own personal experience trying to explain to friends that deficits aren’t the problem they think they are – I’m virtually laughed at. There is no room in most American’s brains for anything other than “the debt is crushing us” as Romney also said last night to a HUGE swing up in the “+” polling
“It’s almost like all these people making that assumption just went and missed the fact that capitalists, being capitalists, have responded to the weak economy by notching up record profits in large part by firing the very people who helped boost their profits (ie, they fired so many workers that their profit margins went through the roof)….Oh, the irony!”
Well said sir, well said!
Since firing this many people has sent profits this high doesnt that mean that firing everyone will make profits approach infinity?!!!!
I’m not so sure the deficit issue resonates with that many voters. Most people would logically realize that the deficit partially supports their job or entitlement benefits. Politicians try to create the illusion that the issues of spending and deficits are somehow disconnected from peoples well being, but intuitively voters know this is not true. Especially with interest rates so low.
Butbut… Romney said that the economy would become wonderful just by him becoming President because of confidence?