Is The Stock Market Discounting an Obama Victory?

The Fed Funds rate is now 2%, down from 5.25% a year ago. The Fed has cut interest rates as gasoline and food prices have been rising quickly. The stock market is usually stimulated by monetary expansion, but it has been slow to react this time. The reason might be psychological, that is, news media reports about recession may have spooked investors. But the stock market declines are continuing past the points where the mainstream media rumor mill ought to have an effect. The Dow Jones Industrial Average was down 131 points today.

One possible reason is the strength that Barack Obama is showing in the polls and the widespread media bias supporting him. This reminds me of the 1976 race when Jimmy Carter, relatively unknown, received a considerable degree of media propaganda in support of his candidacy, which spurred his victory. According to Real Clear Politics Obama currently leads McCain in the major polls by about 4-5%. These differences may not be statistically significant in any one poll, but the fact that all polls are showing similar findings suggests significance. At the same time, public opinion is volatile at this stage of a campaign so a difference at this point may not be meaningful even if statistically significant.

Barack Obama has repeatedly stated that he favors tax increases with respect to capital gains, inheritance and income. Capital gains tax increases would depress the stock market because they reduce the real returns to investors. It is not illogical to consider that the stock market may be depressed at this point in part in reaction to the increasing probability of an Obama victory.