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Opinion: Don’t bet on politics — the stock market doesn’t care who controls the Senate


Don’t blame the stock market’s decline Wednesday on the surprisingly close mid-term election results.

I know it’s tempting to do so.

Conventional wisdom holds that the Republican Party is more business-friendly than the Democratic Party, so it seems plausible that the stock market is falling because what had looked like a sure path to Republican control of the Senate is now anything but.

But a more nuanced analysis of the stock market’s reaction suggests that the Senate results have nothing to do with the S&P 500 Index’s
SPX,
+0.48%

1% drop.

To reach that conclusion, we can look to betting markets, which, among other things, enable investors to wager on election outcomes. One of the futures contracts is tied to whether the Republican Party controls the Senate after the midterms. By correlating changes in that contract’s price with corresponding moves in the stock market, it’s possible to measure the extent to which investors care.

This approach was pioneered two decades ago by Eric Zitzewitz, an economics professor at Dartmouth College. The key to drawing causal inferences, he argues, is focusing on periods in which little else is happening that could affect both the stock market and the election odds.

An illustration of what to be on guard against would be a day when weaker-than-expected economic news is reported. That news very likely would cause both the stock market to fall and boost the odds of a Republican-controlled Senate, but that wouldn’t mean that the increased Republican odds caused the lower stock market.

In an email, Professor Zitzewitz said election night provides an occasion in which plausible causal inferences can be drawn.

He drew attention to the period from 8 p.m. Eastern on Election Day to 1 a.m. Wednesday. During this time, the futures contract tied to GOP control of the Senate dropped from about 80% to 20%. Yet, over this period, S&P 500 futures were essentially unchanged, as you can see in the accompanying chart, below.

Crucially, he added, during this six-hour period, the odds of a Republican-controlled House of Representatives stayed more or less constant. So gridlock in Washington seemed assured regardless of which party ends up controlling the Senate.

The bottom line, according to Zitzewitz: “Control of the Senate is not a big deal for the value of the S&P 500, conditional on government already being divided.”

An ancillary lesson to draw: Don’t let your political beliefs influence your investment decisions.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.



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