Sentiment and [YIKES!] politics

I’ll just reach over and touch this wire here. . .

As far as stocks are concerned, the only thing better than a Democrat White House is a Democrat White House with a Republican Senate.

Since 1901, the Dow Jones Industrial Average has returned 7.46% per year when the President was a Democrat (2.95% when a Republican).  However, with a Democrat President, when Congress is controlled by the Democrats the return per year is less, at 6.90%.  When the Republicans control Congress and the White House is occupied by a Democrat, the return jumps to 9.63% per year.  Thus, the saw, “the market loves gridlock.”

intrade, is a prediction market website, pictured below.  There, one can speculate on everything from will Brett Favre play a down in 2010 NFL season? (yes, 97.4%) to will the Dow Jones Industrial Average close above 10,000? (See further below).  If you’re intrigued by the idea of prediction markets, you can find a lot more on them by clicking here.

Here are three intrade contracts regarding the mid-term elections.

  1. Will the House be under Republican control after the mid-term elections?  The contract is pricing in a 77.9% likelihood, which largely reflects published polls–again, with the difference that intrade contracts require real money.
  2. Will the Senate be under Democrat control after the mid-term elections?  The contract is pricing in just a 25% chance of that.
  3. Will the Democrats keep their 60+ vote lead in the Senate?  Just a 3% chance of that.

So, by most measures, the Democratic party will likely lose one body of Congress, and with just a slim chance, both, but the odds are high that the Democrats lose their filibuster-proof majority in the Senate.  Either way, that’s approaching gridlock, when markets perform at their best.  Furthermore, the third year of a Presidential administration–donkey or elephant–is the best year for stocks.  And yet sentiment is lousy. The intrade contract for the DJIA closing above 10,000 is just at 50.9%, meaning the odds are pretty good that we end up just about where we are now.  Here’s the chart of that contract.  Either the market is ignoring the likely mid-term election results or sentiment would even be worse without them.
Price for 2010 Year End Dow Jones Industrial Average (Market Maker) at intrade.com

Parenthetically, notice the similarity to the American Association of Individuals Investors – % Bullish respondents, below.

Just so you don’t get your political dander up and decide to let loose with some fiery comment, I’ve disabled comments for the first time with this posting.

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