Many investors believe that Wall Street favors Republicans over Democrats. But try telling that to the U.S. stock market over the past 12 months. As you can see from the chart below, the S&P 500 SPX, +2.37% has tended to rise and fall in fairly close correlation with the odds that the Democrats will retain control of the U.S. Senate after the midterm elections in November.
Does this mean Wall Street is actually rooting for the Democrats to retain control of the Senate? Not necessarily, according to to Eric Zitzewitz, an economics professor at Dartmouth College who two decades ago pioneered the use of electronic betting markets to gain insight into the markets’ behavior.
That third variable is almost certainly the U.S. economy, since good economic news will improve both the stock market as well as the Democrats’ chances of retaining control of the Senate. During July and August, for example, when it looked to many as though inflation had peaked, the Democrats’ Senate-control odds improved and the stock market rallied.
According to Professor Zitzewitz: This indicates “how tied the Democrats’ fortunes are to the economy, as opposed to a prediction that their retaining power would be good for asset values.”