Academic journal article Journal of Economics and Finance

The Obama Effect

Academic journal article Journal of Economics and Finance

The Obama Effect

Article excerpt

Abstract

Many observers argued that Barack Obama's candidacy in the U.S. presidential election of 2008 benefited from the financial crisis and recessionary economic conditions which voters blamed on the Republican administration. However, an empirical examination of stock price and public opinion data indicates that improvements in Obama's electoral prospects led stock price declines and that gains by Obama were more likely to be followed by falling stock prices than by rising prices. This evidence suggests that the poor performance of the stock market in the days leading up to Obama's victory was partly caused by, rather than causing, Obama's success.

Keywords Election * Stock Market

JEL codes D72 * D84 * G01 * G12

1 Introduction

During the U.S. presidential election campaign of 2008, the conventional wisdom expressed by many political commentators, and a recurring theme in media reports on the election, was that Barack Obama's lead in the opinion polls was due to the financial collapse precipitated by the sub-prime mortgage crisis, the plunging stock market and forecasts of a severe recession. Because these economic difficulties had arisen during a Republican administration, it was perhaps inevitable that voters would blame the Republicans and tum to the Democratic candidate for deliverance from further disaster. This view follows plausibly from the well-accepted dictum mat individuals tend to "vote their pocketbooks."

As evidence for the positive impact of the economic crisis on Obama's performance, most reports cite opinion poll results indicating that a majority of respondents believed that Republicans were responsible for the crisis, that Obama would be more effective in dealing with die economy man would his Republican opponent, John McCain, and that mis belief was especially strong among those potential voters who thought that the economy was ihe issue of foremost concern or importance in the election. Thus, for example, according to a September 2008 CNNI Opinion Research Corp. poll, 47% of registered voters believed mat Republicans were primarily to blame for the problems confronting financial institutions and the stock market, while only 24% held Democrats responsible.1 A Washington PostABC News national poll, also conducted in September 2008, found mat, among likely voters, Obama held a 53-39% lead as the candidate most trusted to handle the economy and Obama led by 13 points in perceived ability to deal with the failure of major financial institutions.2 Among voters who prioritized the economy, Obama had an almost two-to-one lead over McCain.3 A Quinnipiac poll released on October 1, 2008 showed 46% of those surveyed in Pennsylvania viewed Obama as more able to address the problems of the economy, compared to 37% for McCain.4 A Wall Street Journal/NBC News poll, conducted on October 4-5, 2008, reported that approximately one in three voters were "more reassured" by Obama's handling of the economic crisis versus just 25% for McCain.5 By early October 2008, it became clear that Obama was the favorite to win the election, apparently in large measure thanks to the financial crisis.6

However, while Obama's lead solidified in late September and early October, the crisis arising from financial institutions' exposure to securitized packages of subprime real-estate loans dated at least to the government-brokered takeover of Bear Stearns in March 2008, the failure of IndyMac Bank in July and the Treasury seizure of Fannie Mae and Freddie Mac on September 7, 2008.7 If concerns about the financial crisis were the main cause of Obama's successes, his dominance of the opinion polls should have shown up earlier than it did. On the other hand, there is a remarkable coincidence of timing between Obama's electoral prospects and the crash of the stock market. The stock market commenced its dramatic 1-week plunge on October 6, shortly after most of the polls started to suggest that Obama was likely to win the election. …

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