Conclusion: While the recent ABC News / Washington Post poll showing Romney ahead of Obama is noteworthy, we are sticking with our view that President Obama’s re-election seems more likely than not, though will be watching the data and poll internals closely.
We’ve been of the view that an Obama re-election is likely. Aside from the natural advantage that a Presidential incumbent has, which is estimated to be more than 2% by many statistical studies, the fact that the Republican field has been late to the race and has no meaningful front runner (the leading contender, Romney, only has 20% support amongst Republicans in most polls) also supports Obama likelihood of re-election. As well, while the economy is clearly sputtering, unless GDP growth goes negative, it will likely not have a negative impact on Obama’s re-election efforts.
In fact, we utilized Professor Ray Fair’s, from the Yale Economics Department, model to try and quantify the outcome of the election. Based on Fair’s formula, if President Obama had no more good news quarters of 3.2%+ growth and even if real GDP growth was flat lined at zero through the 2012 election, he would still have a legitimate shot at the Presidency. In fact, according to the Fair Model, in that scenario, President Obama would win 50.4% of the two party vote. (The Fair formula is here: http://fairmodel.econ.yale.edu/cgi/computv5.pl)
The news yesterday in political circles was the ABC News / Washington Post poll, which showed Romney beating Obama by +3 points amongst registered voters for the first time in any major poll. While one poll is not a trend, this is a poll worth noting. In the same poll, Romney gained about 4 points amongst all potential voters from the April 17th, 2011 poll.
As it relates to the internals of the polls, President Obama fares very poorly on his handling of the economy. According to the poll, “among the nearly six in 10 American who think economic recovery has not yet begun, a vast 69 percent disapprove of the president’s job performance overall and 64 percent say they won’t even consider voting for him in 2012.” This is also reflected in the ABC News Frustration Index, which is currently at an elevated 68. It was 67 last Fall when the Republicans regained the House, 73 when the first President Bush lost re-election, and peaked at 80 in 2008.
So, while the Fair model suggests we need a double dip economy for Obama not to get re-elected, we also need to be cognizant that Obama’s re-election prospects are getting more tenuous. The much heralded bin Laden bounce was not sustainable, as we predicted, and President Obama’s approval rating on the Real Clear Politics aggregate is rolling over. Over the last two weeks, the spread between approval and disapproval has narrowed 4.4 points, which is statistically relevant.
The potential risk to our view that Obama could be re-elected is unemployment. No President since World War2 has been re-elected with an unemployment rate above 7.2%. Despite the Obama administration’s continued defense of their ability to create jobs in aggregate, the current unemployment rate of 9.1% is a barrier facing Obama in his re-election efforts. So far, though, it seems this barrier may still be overcome by the incumbency advantage and the lack of a true front runner from the Republican Party.
As stock market operators, we obviously are advocates of the predictive ability of markets. As such, we would point to the current contract on Intrade, which prices the odds on an Obama re-election. Currently, the contract is trading at 60.5, while Mitt Romney is trading at 30.0. Interestingly, neither of these contracts has seen a meaningful move, other than a brief Obama bounce after the killing of bin Laden, and have been close to those prices since the start of 2011.
The political contract on Intrade that we find most compelling is the one that represents the odds that Representative Weiner will resign by September 30th, 2011. Currently, it is trading at 67%. Regardless of political affiliation, it is likely most Americans would like to see an expedited move to 100% on that contract.
Daryl G. Jones
Managing Director