I discussed here how capital gains taxes affect stock prices, and here how this effect is magnified for growth stocks relative to value stocks. Essentially, as capital gains taxes increase, growth stock prices will fall faster than value stocks prices, and conversely as capital gains taxes decrease, growth stocks will appreciate faster than value stocks. As a result, the relative returns of growth versus value stocks provide insight into the market’s expected likelihood of changes in capital gains taxes, among other things. Given the short time span before the presidential election, and the very different tax positions taken by the two candidates, the behavior of growth versus value stocks will give us the market’s prediction regarding the election’s likely winner.
Should an Obama victory become more likely, value stocks will tend to outperform growth stocks. In fact, over the past week, as the Democrats had a great convention, and media piled on Sarah Palin, value stocks outperformed growth stock, reflecting the favorable environment for a Obama victory. This last week, however, stood in contrast to what has been a favorable summer for McCain, which tended to explain why growth stocks trumped value during much of this time.
Last night, Sarah Palin’s speech may have fundamentally changed the presidential race, and in her honor I created the Palin Barracuda Index. The Palin Barracuda Index (PBI) measures the return difference between growth and value stocks, giving us an insight into which direction the market is leaning at a point in time.
I launched the PBI with a value of 100 on September 3, 2008. Increases in the index indicate an election environment favorable for McCain and his intention to keep Capital Gains taxes at their current levels. Decreases in the index indicate an environment favorable for Obama and his tax raising philosophy.
The higher the index value, over the next couple months, the more likely the market anticipates a McCain victory. The lower the index value, the more likely the market anticipates an Obama win. I will provide ongoing commentary to discuss significant changes to the index, and add graphical trends as more data becomes available to visually track how market sentiment about his presidential has changed over time.
Today the Palin Barracuda Index closed at 100.3, up 0.3. Good news for economic freedom!
I will update the PBI regularly throughout the election.
September 5, 2008 at 2:08 pm |
I’m wondering what your results would be in the pre-Palin time frame.
How does the PBI look in 2007 and 2006. That would give us an Historical baseline.
Steve
PS
Yes, I know – she “didn’t exist” on the National Stage before last week – but the charts would still be interesting to examine.
S
September 5, 2008 at 4:39 pm |
Brilliant. And the Palin Barracuda Index provides you with a way to get rich. All you have to do is look at Intrade — when the odds from traders there deviate from your better knowledge, you can advantage of their ignorance and delusion.
September 5, 2008 at 5:07 pm |
[...] The Palin Barracuda Index I discussed here how capital gains taxes affect stock prices, and here how this effect is magnified for growth stocks [...] [...]
September 5, 2008 at 8:55 pm |
This is a bunch of horse hockey. What does Palin have to do with value vs. growth stocks. In 12 or 20 years, this name will be worthless. She will descend faster than anyone in recent history. She will soon prove to be an embarrassment to the GOP and to your otherwise intelligent concept.
September 5, 2008 at 11:04 pm |
Palin is here to stay, at least through the year 2016.
September 7, 2008 at 12:25 pm |
Doesn’t any interpretation of the PBI assume that on September 3, 2008, the market was predicting that the probability of a McCain-Palin election was exactly fifty percent? And isn’t that assumption, well, a bit presumptuous? It could be that a rise in the PBI from 100 to 100.3 is simply a change from a “seriously low probability” of a McCain election to a “somewhat low probability” of the same (or a change from a “somewhat high” to a “seriously high” probability). I suppose I’m asking for the same thing as Steve–a pre-Palin baseline that will give the present PBI some context.
(To Franko: It’s not that Palin really has anything to do with value and growth stocks. It’s that the McCain-Palin platform has a lot to do with the capital gains tax, and therefore with the stock market.)
September 14, 2008 at 9:35 pm |
[...] Barracuda Index – 9/12/08 Update The Palin Barracuda Index (PBI) closed the week at 101.4, up 1.9 points from [...]