THIS WEEK: 10 Things To Know About Weekly Options, Thurs., August 16 at 6pm ET w/Russell Rhoads and Jill Malandrino. CLICK HERE FOR INVITE AND TO REGISTER. The nomination of Paul Ryan to the 2012 Republican ticket is already one of the most polarizing electoral events since the selection of Sarah Palin in 2008. Whatever your politics, you might be wondering what significance, if any, this weekend's announcement has for your portfolio. Some pundits have wasted no time making predictions based on the Republican VP news. For example, Brian Wesbury, chief economist for First Trust, an asset manager in Chicago, said on Sunday that "the bounce in the polls Romney gets from the VP pick should push the stock market higher this week." When I pushed back against this claim on Twitter, Wesbury doubled down: "Romney bounce in polls means higher likelihood of pro-growth policies
which means higher equity prices." Let's leave the substantive politics to the side. Whatever kinds of policies you favor, making successful predictions about short-term market movement based on the electoral news cycle is almost always impossible. In this case, there are fragile links all along the purported causal chain from the Ryan pick to the S&P 500 close on Friday. Here are a few. - Romney has already indicated that he would not pursue Ryan's major reform proposals, so it isn't clear why a voter would evaluate the likely policies of a Romney administration differently now than she would have done last week. - The political impact of the Ryan pick is unclear, but even if you think it improves Romney's chances, the rational net credence adjustment in subsequent long-term equity valuations should be tiny given the time-frame and general uncertainty involved; that adjustment is within the window of general market noise, not a cause for a major surge in stock prices. - Also, there is no evidence that investors and traders in general will evaluate political events in a unified way. Many investors are said to be assigning equities a higher valuation based on expectations of more short-term quantitative easing, but that expectation is inconsistent with a high equity valuation based on the purportedly tight-money orientation of politicians like Ryan. - Then there are all the generic, always-applicable arguments against making market predictions based on expectations about the economy. The economy is not the market: stock prices relate to economic conditions in different ways over time, and even if an economic policy makes a significant improvement in the real economy, stocks may or may not react in a predictable way to that change. - Even if there was some causal connection between the political event and the market result, there is no way of confirming that connection ex-post. Markets move for countless reasons, and isolating one news item as a unique cause would be difficult even with the benefit of hindsight.
2012.PRES.ROMNEY 1W log change vs. SPX 1W log change (1W lag), 2011 - 2012
Source: Condor Options, CBOE, Intrade
Given such a tenuous set of causal links, there is no reason at all to have any confidence that the candidate Ryan will have any predictable effect on the market one week or one year from now. But just for the sake of argument, let's ignore all of those conceptual problems, and look at the empirical data. The claim, again, is that because Romney is ``pro-growth,'' higher polling numbers should cause investors to raise equity valuations. Wesbury pointed to this as a week-by-week relationship. In the attached chart, we've plotted the weekly change in Romney's electoral chances as tracked by the 2012.PRES.ROMNEY contract at Intrade against the weekly lagged S&P 500 returns. If a boost for Romney in the polls this week can predictably cause a rally in the market next week, there should be a discernible relationship among these data. But as you might have expected, a regression on this series shows no statistically meaningful relationship whatsoever (r^2 = 0.029). So what does Paul Ryan mean for your stock portfolio? The same thing that most other events in the electoral cycle mean for your portfolio: nothing. OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits Jared can be followed on Twitter at twitter.com/CondorOptions