Richard Drew / AP
Hmmm. I wonder who will win in November? Specialist Edward Zelles check prices at his post on the floor of the New York Stock Exchange. The stock market is a much better predictor of presidential re-election bids than the gauges investors have traditionally consulted, according to a new study.
By Roland Jones, NBC News
If you want to know who?s going to win the White House this November, your best bet might be to fire up your laptop and download some stock market tables.
According to a new study posted on the Social Science Research Network (SSRN), which distributes social science research from specialized research institutions, the stock market is a much better predictor of presidential re-election bids than the gauges investors have traditionally consulted, such as the nation?s unemployment rate.
In their study, titled ?Social Mood, Stock Market Performance and U.S. Presidential Elections,? by Robert Prechter and Deepak Goel of the Socionomics Institute, a research think tank, Wayne Parker of Emory University and Matthew Lampert of the University of Cambridge, the researchers studied every presidential re-election campaign in U.S. history going back to George Washington's successful bid of 1792.
They found that incumbents who served during periods of rising stock prices typically do better in the elections than those who served during periods of falling stock prices.
?The best single predictor of presidential re-election results that we found was the percentage change in the stock market during the three years that preceded Election Day,? said Emory University?s Goel, adding that the jobless rate ?had no predictive value in any of our tests.?
In 1996, for example, President Bill Clinton saw a landslide win after the stock market, as measured by the Dow Jones industrial average, surged 63.8 percent in the three years ahead of the election. By the same measure, Herbert Hoover saw a landslide loss in his re-election bid in 1932 after the stock market sank 77.3 percent in the previous three years.
The findings could be good news for President Barack Obama?s re-election campaign. Since mid-October 2009, the Dow has risen 34.8 percent -- that isn?t as robust as the returns cited as examples in the researchers? paper, but it may be enough to see Obama returned to the White House for four more years.
The researchers set out to test something called ?the social mood? -- essentially, how voters feel -- and whether it can influence the outcome of an election.
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When the trend in the social mood is positive, investors tend to push stock prices higher and when they vote they tend to retain incumbent leaders. Conversely, when the social mood is negative, stock prices tend to decline and voters oust incumbent leaders.
When they attempted to quantify the impact of the social mood the researchers found that, to use an analogy, if the incumbent election outcome were a dollar of income, the stock market?s performance would contribute just shy of 33 cents of that dollar, whereas the nation?s unemployment rate would contribute just over a penny.
The results do not depend on whether or not people ever actually own or trade any stocks, according to the researchers.
To test the robustness of their findings, the researchers went on to test the predictive ability of the so-called ?big three? economic indicators: gross domestic product (GDP), or the nation?s aggregate economic output, the inflation rate and the unemployment rate. They also tested the inflation-adjusted GDP.
The three indicators were tested individually and in combination with the stock market. The researchers found that the market outperformed each indicator over specific time frames.?Inflation and unemployment had no significant ability to predict the outcome of an election. Economic growth was a significant predictor of elections, but not as significant as the Dow?s performance.
?We believe our study helps demonstrate that aggregate voting at the margin -- swing voters -- are not so much rationally weighing the potential value of each candidate but rather voting primarily based on how they feel,? Emory?s Robert Prechter wrote in a blog on the findings of the research.
?When a positive trend in social mood induces investors to push the stock market upward during the three years prior to an incumbent?s re-election bid, it also induces voters to credit the incumbent for their good moods and vote to retain him in office,? he added.
The findings of Prechter and his colleagues jibe with what economists have called the ?wealth effect? -- the idea that a rising stock market makes people feel wealthier and more confident about the broader economy.
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Sam Stovall, chief equity strategist at S&P Capital IQ, notes that since 1900 there have been 28 presidential elections, with Democrats winning the White House 13 times, or 46 percent of the time, and Republicans triumphing 15 times, or 54 percent of the time.
In most instances, ?the stock market has proven to be a reliable predictor of things to come,? with the broad S&P 500 stock market index -- if it rose in the three-month period from July 31 through Oct. 31 -- signaling ?the re-election of the incumbent,? Stovall wrote in a research paper titled ?The Presidential Predictor: Stock Price Performances Have Typically Presaged Victors.?
The S&P 500 has been especially good at predicting a changing of the guard at The White House, he said.
In eight elections since 1900, the party in power has been replaced 88 percent of the time -- a turn of events predicted by a price decline for the S&P 500 from July 31 through Oct. 31. It has failed only once -- in 1956, when the S&P 500 fell 7.7 percent during this three-month period, yet Adalai Stevenson did not replace President Dwight Eisenhower.
?Two reasons could have contributed to the atypical market slide: The Suez Canal Incident and the Soviet putdown of the Hungarian uprising,? Stovall said. ?On average, during all election years that pointed to the incumbent?s replacement, the S&P 500 declined in each of the three months, and recorded a July-August sell-off of 5.1 percent.
This year, the S&P 500 is up 4.1 percent since July 31, suggesting an Obama victory on Nov. 6.
Matthew Lampert of Cambridge University notes that, even though the stock market has trended higher during Obama?s tenure, something that should bode well for his re-election chances, a potentially complicating factor is that the current stock market advance could be a bear-market rally -- that is, a shorter-term uptrend within a long-term decline.
Presidents who have served during bear-market rallies have tended to enjoy less popular support than those who served during bull markets, he wrote in an e-mail message.
?We won't know for a while if President Obama has been serving during a bear market rally, but even if he has, the president can seek initial solace in one historical case,? Lampert said.
?Richard Nixon was re-elected in a landslide near the top of a bear market rally in 1972,? he continued. ?But the news isn't altogether good because Nixon's popularity plummeted, and he resigned from office less than two years later after the larger-degree bear market resumed.?
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