Barry Ritholtz takes issue with a recurring myth that comes up during election season:

We all fall under the spell of faulty logic sometimes, confusing what is cause and what is effect. As another example of this, consider the following:

“Obama is currently the presidential frontrunner. Note that, on Intrade, the market odds of an economic recession in 2008 are rising in tandem with the odds that Obama will be elected President. Correlation does not prove causation but this correlation is worrisome.”

All too often, we see the cause and effect relationship analyzed exactly backwards, as in the above example. These causative errors are an all-too-common analytical blunder when reviewing market or economic data. Unfortunately, in seeking certainty in an uncertain world, confusing cause and consequence is an all-too-regular occurrence. The above quote is a perfect example of that foible.

To review: Markets are not skittish because the incumbent party is in trouble - that’s getting it ass-backwards. When the ruling party is in election trouble, its because the future discounting mechanism of markets is incorporating a slowing economy into its pricing. Markets may be imperfect and subject to the excesses of crowd behavior, but they eventually get the big picture correct. The current market malaise reflects a recognition what is occurring in the macro-environment.