The 'Wall Street' Election Poll

NEW YORK (TheStreet) -- The biggest event for investors over the next six months is likely to be the November elections in the U.S. The outcome of the elections will define the political context and leadership for policies that address the looming fiscal imbalances coming to a head in early 2013.

We have explored this budget bombshell in prior commentaries and what it could mean for the markets and economy. This week we will take a look at what the market is pricing in regarding the election outcome.

As we explore the issue of what the market is pricing in when it comes to the outcomes of the November elections, it is important to be aware of the shortcomings of overly simplistic election analysis.

An illustration of this can be seen in Chart 1, where we plot the odds of President Obama's re-election (measured by contracts traded on Intrade.com) and the movements in the stock market, measured by the S&P 500 Index. Is the stock market going up because of the rise in Obama's re-election odds, or are Obama's re-election odds going up because the stock market is rising -- or, more likely, are both tied to something else?

The S&P 500 is an unmanaged index, which cannot be invested into directly. Past performance is no guarantee of future results.

Attempting to draw simple conclusions about what the market is saying about the election is fraught with the potential for misinterpretation. Instead, there is a better, more analytical way for investors to attempt this kind of potentially rewarding analysis. Analyzing the market by the industries most impacted one way or another by the election outcome can provide more precise insight into what the market is pricing in regarding the election.