Washington’s precarious fiscal-cliff stalemate. Photograph by Steven Puetzer

Volatility has returned to U.S. stocks since the presidential election, and it’s partly Washington’s fault as the fiscal-cliff stalemate makes investors more and more skittish, according to JPMorgan Chase & Co.

And even bigger swings may be on the way soon, because derivatives tied to the equity market expire tomorrow.

The Standard & Poor’s 500 Index has slumped more than 5 percent since the Election Day close, ending yesterday’s session at the lowest level since July 25. Ninety percent of that retreat “can be attributed to concerns about the U.S. fiscal cliff,” Marko Kolanovic, global head of derivatives and quantitative strategy at JPMorgan, wrote in a report today.

Most of the slide happened in the first session after the election and during or just after two addresses by President Barack Obama on Nov. 9 and Nov. 14. Those spurred “market concerns about going over the cliff” and coincided with the usually low-volume times around 1 p.m. and 1:30 p.m. New York time, Kolanovic wrote.

The president used his first post-election news conference yesterday to threaten that he’ll let the Bush-era tax cuts expire if the Republican-led House shows “too much stubbornness” and won’t extend the tax cuts only for income up to $200,000 for individuals and $250,000 for couples. Stocks extended declines after he spoke, ending the day down about 0.8 percent from before the press conference.

If Congress doesn’t act by year’s end, $607 billion in automatic spending cuts and tax increases scheduled would cause a recession, according to the nonpartisan Congressional Budget Office.

Concerns about Washington gridlock overlap with tomorrow’s expiration for options contracts tied to underlying stocks, which “could cause high intra-day volatility” as investors and traders buy and sell both derivatives and shares to adjust their positions, Kolanovic said in his analysis.

The November options expiring tomorrow are linked to about $450 billion in S&P 500 stocks and futures, the New York-based strategist wrote. That’s a fraction of the index’s $12.1 trillion market value, yet still enough to make the market gyrate because one gauge of value for the expiring contracts tilts in the direction of bearish options versus bullish ones, according to Kolanovic.

Coincidentally, he estimates, the $850 billion in stock market value wiped out since Americans cast their ballots is roughly equal to what the CBO estimates that allowing the Bush tax rates to expire for top earners over the next 10 years.

As lawmakers prepared for budget talks, the S&P 500 slipped 0.2 percent to 1,352.93 at 11 a.m. after swinging between gains and losses and moving in a 0.65 percentage-point range. That’s less than half the average full-day swing over the past month.

Original post is JPMorgan: Fiscal Cliff Slow-Walking Feeds Stock Market Volatility by Political Capital.

Photograph by Mario Tama/Getty Images

Traders work on the floor of the New York Stock Exchange.

Wagers on President Barack Obama ’s re-election rose last week to a 16-month peak, according to the online prediction market Intrade. At the same time, the Standard & Poor’s 500 index advanced to the highest level since 2007.

Capital Economics senior U.S. economist Paul Dales in London, who’s been tracking the correlation between stocks and politics, says that’s no coincidence. Dales published a Sept. 5 commentary titled, “Is the stock market cheering for Obama?”

Bets on Republican predecessor George W. Bush surged as well in 2004, suggesting incumbency counts more than party affiliation in the markets.

“Markets like certainty,” Dales said. “The market doesn’t really prefer one party to another. With an incumbent, you know what the policies have been and how they will deal with things.”

Stocks also tend to rise with good economic news, which benefits the president, he said.

Economists disagree on the significance of the relationship. Democratic administrations have tended to favor expansionary policies that have boosted job growth, said Harvard University economist Jeffrey Frankel, who was a member of the U.S. Council of Economic Advisers in Bill Clinton’s administration.

“This sounds like a spurious correlation” with markets responding “to well-known perceived effects of good and bad economic news,” said Stanford University economist John B. Taylor, a Treasury undersecretary in Bush’s administration and a supporter of Romney.

Whoever is right, it is good news for Obama. There was a 66 percent chance of an Obama win as of today, according to Intrade bets. Dales figures the president will win reelection so long as the S&P 500 stays over 1,200. That looks pretty certain, he says, with the index at 1465.77 on Sept. 14.

Original post is S&P 500 At 5-Year High May Be Signaling Obama Win by Political Capital.

The Standard & Poor’s 500 Index typically gains 5 percent through year end after close presidential contests. That’s more than double the 2.3 advance that it has posted since 1948 after “predictable” elections, according to Binky Chadha, the firm’s New York-based chief global strategist.

“Clearly predictable elections saw the S&P 500 essentially continue its prior trend,” Chadha wrote in a note today. “Close elections on the other hand saw the S&P 500 flat in the lead up to, but rally a strong 5 percent on average afterward, regardless of which party won. The latter behavior is consistent with a classic risk premium reflecting uncertainty about the outcome in the run up with a rally on its resolution.”

Obama is fighting for a second term amid economic growth proving too sluggish to decrease a jobless rate that hasn’t been below 8 percent since January 2009, the month he took office. The S&P 500 has rallied 11 percent this year as the Federal Reserve pledged to safeguard the U.S. economy and European leaders worked to contain the region’s debt crisis.

Republicans taking full control of Congress may be more bullish for stocks, which climbed 15.1 percent on average when that party controlled the legislative branch, according to Chadha, whose prediction that the S&P 500 would climb 26 percent in 2009 was only 3 percentage points off from the measure’s rally that year.

“Republican control of Congress has been very positive for equities historically, independent of the party of the president,” Chadha wrote, citing S&P 500 returns for all years since 1933, including non-election years.

Chadha cited better than even odds given by traders in the online prediction market Intrade that Democrats will lose control of the Senate and give Republicans control of both houses. Bets made via the Dublin-based bookmaker today showed a 53.7 percent chance that Democrats would lose control of the upper chamber, while traders priced in 57.9 odds Obama will be re-elected on Nov. 6.

The presidential race is too close to call according to the latest daily Gallup poll, in which Obama leads Romney 47 percent to 46 percent. The margin of error is three percentage points, making results within that range statistically negligible.

The postwar era’s big surprise, Chadha wrote, was the correction following Harry S. Truman’s 1948 defeat of Republican challenger Thomas Dewey, memorialized in a famed photo of the incumbent Democrat waving a copy of the Chicago Tribune with the mistaken front-page headline: “Dewey Defeats Truman.”

The news surprised stocks too. The S&P 500 plunged to 15 from 16.70 for a 10 percent drop over six trading days.

Inyoung Hwang contributed to this post.

Original post is Close Elections Boost U.S. Stocks, Deutsche Bank Says by Political Capital.

Photograph by Scott Eells/Bloomberg

A trader works at the New York Stock Exchange.

No matter what the unemployment rate is, a president is more likely to be re-elected if the stock market rose on his watch, according to a study by four university professors.

The report by Robert Prechter and Deepak Goel of the Socionomics Institute, Wayne Parker of Emory University and Matthew Lampert of the University of Cambridge studied every American election involving an incumbent since George Washington first stood for re-election in 1792.

It found no “significant relationships” between vote margins and either inflation or unemployment.

“The best single predictor of presidential re-election results that we found was the percentage change in the stock market during the three years that preceded Election Day,” Goel said. “Unemployment had no predictive value in any of our tests.”

So as Republicans at their presidential nominating convention  in Tampa cite an unemployment rate above 8 percent, President Barack Obama can take solace in the fact that the Standard & Poor’s 500 Stock Index has risen 75 percent since he was inaugurated on Jan. 20, 2009.

Original post is Forget About Unemployment Rate — S&P 500 Bigger Nov. 6, Study Finds by Political Capital.