The Stock Market and Elections

With less than three months to general elections, I have been getting several emails on how "predictable" stock markets are before elections. I even ended up with a survey request from a respectable asset management division of a major bank, as they were getting opinions from a bunch of economists.

When you just had to look at ISE, you might find a pattern if you look hard enough (try the 2007 general and 2009 local elections):

 But then if you go a bit deeper and consider how the ISE fared in relationship to other EM....

....The relationship suddenly disappears! Magic!:)....

Besides, the environment today is much different than in 2002, 2007 and 2009. For one thing, banks, which make up a considerable chunk of the ISE index, are faced with considerable pressure from the CBT and the government for curbing loan growth, measures bound to eat into profits of banks. The global environment is especially different than the last general elections in 2007, which was the last days of the so-called "new normal".

As a general point, such fast-track conclusions based on simple relationships, without controlling for everything else (global economic conditions, domestic economic conditions, etc) are bound to suffer from what economists call omitted variable bias. 

The hyperlink is somewhat technical, so to illustrate my point with a more mundane example: A rather harsh critique of my previous week's column on the Turkish corporate banking mess noted that there would be no way to know that my friend's father had committed suicide because of other reasons; maybe, he was an alcoholic, maybe he had family problems... Those were not the case, but this is what OVB is all about...