October 26, 2006 | Wall Street JournalMany Washington pundits see a Democratic takeover of the House of Representatives as a done deal. Wall Street is still waking up to it. Polls show voters increasingly favor a changing of the guard in Congress. An election-prediction market run by the UNIVERSITY OF IOWA, in which investors bet on what party they see winning the Nov. 7 election, puts the chances of Republican's losing control of the House at 65%, up from 39% a month ago. The Iowa market puts the chances of Republicans losing the Senate at 30%, from 17% a month ago. This matters for markets. A paper by Stanford economists Erick Snowberg and Eric Zitzewitz and Wharton economist Justin Wolfers found a connection between election odds as measured by these prediction markets and stock and bond market-price movements. They found that in the past, investors have seen the election of a Republican president as good for stocks but bad for bonds. This time, the Dow Jones Industrial Average has been rising as the odds of victories in Congress by Democrats have increased. Prices of long-term bonds, meantime, have fallen since September after rising in the summer.
Contact: Forrest Nelson