It looks like the stock market has a lot to do with the presidential race. At least it does for the souls who use Intrade. The calculus of presidential elections is simple. If the economy is doing relatively well at the time of the election, then the incumbent usually wins.
The economy is plagued with issues including weak demand and the looming threat of eurogeddon. Therefore, the president will deploy a two front strategy. On one front, he will continue behind-the-scenes politicking of the Fed for more stimulus. While monetary policy only affects our economy in the short-term, that’s exactly what is needed, a short-term boost that QE can provide. If this policy is announced at the next Fed meeting, the effects will easily carry us to the election.
The other front is in Europe. A sovereign debt crash will kill American markets and lessen the president’s chances for reelection; hence, he will continue to push Europe towards bailouts. On one side, he needs to get Spain to request help and on the other side he needs to convince Germany to allow the ECB to crank up the magic money machine to buy sovereign debt.
I see him accomplishing these political tasks. He will win a second term, and we will all be paying for these foolhardy interventions long beyond it.