Election Update

Back in the Fall I wrote that if the economy didn't improve, come January 2013 Mitt Romney would be sitting in the White House and Republicans would control the House and Senate ("Will President Obama Be Reelected?"). Then in March I noted that the economy had picked up, substantially improving President Obama's prospects for reelection ("Election (Not Weekend) Update"). In fact, I argued that as long as the European debt crisis or rising oil prices didn't cause the U.S. economy to go into a tail-spin, President Obama should be reelected in November.

Since that time, things have gotten a bit dicier for the President. The economy doesn't appear to be as strong as a number of people thought it was, and the European economy keeps lurching from one debt crisis (Spain) to another (Greece, Italy). Both have taken their toll on the US stock market and President Obama's chances. Nevertheless, at this point it still appears that President Obama holds the upper hand but just barely. Prediction markets currently have him as a favorite to win (around a 54%-56% chance of winning as compared to Romney's 44%-46% chance).

If you recall, prediction markets are not popularity polls. They are speculative markets created for the purpose of making predictions, and current market prices are generally interpreted as the probability of the outcome occurring. They tend to be quite accurate (see the chart from Scientific American to the right). People make money in the markets by buying low and selling high. For example, currently the price of a share of President Obama sells for around $0.55, which means that if he wins, the holder of that share will receive $1.00. Needless to say, people who invest are in such markets are interested in making a profit, so they attempt to take into account a variety of factors (e.g., the economy) in making their decisions. The one thing they don't try to do is bet on  a candidate just because they want him or her to win.

The following graphs from the University of Iowa Electronic Markets (IEM) illustrate the rise, fall, and stabilization of Obama's prospects. The first one indicates the probability of either the Democrat candidate (blue line) or Republican candidate (red line) winning the election. As you can see, back in the Fall, the red line was actually above the blue line for a short while, but then once 2012 arrived and the prospects of a healthier economy became real, the market shifted in favor back to the Democrat candidate. Until the middle of May, that is. Then you can see a big drop in the blue line and a concomitant jump in the red line, both indicating a rise in Romney's prospects and a decline in Obama's. The market began to stabilize in late May, early June, with Obama sitting around 55% (i.e., you can buy a share of Obama for $0.55).

The next chart indicates how close the election appears to be shaping up. It attempts to predict the vote share of the final vote.

This is telling us that right now it appears that Obama will get around 52%-53% of the votes. That's close enough for Obama to win the popular vote but lose the electoral vote. We will have to wait and see.

On other fronts, the Democrats are still likely to lose control of the Senate although it is possible (around 19%) that neither the Republicans or Democrats will control it when all is said and one. That would make for an interesting couple of years.