Subscribe to Money Morning get daily headlines subscribe now! Money Morning Private Briefing today's private briefing Access Your Profit Alerts

Election 2012: Obama's Odds Are Pretty Good if You Ask Mr. Market

If you want to know who's going to win Election 2012, just ask Mr. Market. He has a knack for picking presidential winners.

As it happens, stock market performance in the years and months leading up to a presidential election is one of the most reliable indicators of who will win and who will lose.

And the way things look at the moment, Mr. Market really likes the President Barack Obama reelection odds.
Obama Reelection odds
"It's suggesting that Obama's got a better chance than people think," Jeff Hirsch of Stock Trader's Almanac told Yahoo's Breakout last week. "Incumbent victories are accompanied by much larger gains in the stock market. The Dow Jones has been up significantly higher in election years when incumbents win. And it looks like the track that we're on here."

Hirsch's data shows that since 1901, election years in which the incumbent wins enjoy a Dow Jones Industrial Average rise of 6% by August and 12% by Election Day.

So far this year, the Dow is up nearly 8.5% — comfortably in re-election territory for President Obama.

Markets Raise Obama Re-Election Odds

Hirsch isn't the only one studying the relationship between Mr. Market and the elections.

Earlier this year the Socionomics Institute of Atlanta did a study that showed the Dow's performance in the three years leading up to a presidential election predicted the winner more accurately than such economic indicators as GDP, unemployment and inflation.

The Socionomics Institute study found that a Dow gain of 20% or more over that three-year period almost guaranteed victory for the incumbent. A drop of 10% or more resulted in a one-term president.

The Dow is up 35% since Nov. 1, 2009 (the Institute uses Nov. 1 because it closely coincides with the November elections). That's about the same increase as under President Bill Clinton – the last Democratic president to win re-election.

The Socionomics Institute also tested one-year, two-year and four-year periods.

"Right now on all four of those periods the stock market is positive," Robert Prechter, president of Elliott Wave International and a co-author of the study, told Yahoo's Breakout in June. "So the odds would be that Obama, if the election were held today, would be re-elected. But it's a long time to the election."

Prechter also has a theory about why the stock market is such a good predictor of presidential elections.

"Social mood is behind both of these," Prechter explained. "It changes people's perception of how the president is doing and it also changes traders' decisions about whether to buy and sell. So we're not surprised at all that those are in very close lock-step."

Mr. Market's ability to predict elections also works with shorter time periods.

Stan Stovall, chief investment strategist for Standard & Poor's Equity Research Services, has found that market performance in the third quarter of an election year is a pretty strong indicator of a presidential incumbent's fate.

"Since 1900 whenever the market rose in the August, September and October time frame … the incumbent has been re-elected 80% of the time," Stovall told Yahoo's Breakout earlier this month. "Whenever the market has fallen from July 31st through October 31st, the incumbent has been replaced 88% of the time."

Since July 31, the Dow is up 1.3% and the Standard & Poor's 500 is up 2.1% — still good for President Obama's reelection odds, but vulnerable to a sudden reversal.

Mr. Market's Political Preferences

Just as the market can predict election outcomes, election results can predict market performance.

For one thing, investors prefer incumbent presidents.

"The important thing is that we have an incumbent running for re-election, and that's been good for the market overall," said Hirsch, adding that since 1901 the Dow has gained an average of 9% in such years.

Mr. Market also has preferences regarding Republicans and Democrats, as well as party control of the branches of government.

"Everybody thinks a Republican president has been better for the stock market," Hirsch said. "Actually it's Republican Congresses that have presided over the greatest market gains."

Republican Congresses have enjoyed average gains of 16.8%, compared to just 6.1% for Democratic Congresses.

Stock market and politicsPerhaps more surprising is Mr. Market's affinity for divided government.

"Combine in a Democratic president [with a Republican Congress] and you get a 19.5% average gain," Hirsch said. "The bar just shoots up. That's the combo that's been best for the market."

However, Mr. Market doesn't like Congress itself split between the two parties as it is now with a Republican House and Democratic Senate.

"Since 1900 whenever we had a totally unified [Congress] the return in the stock market has been more than twice that of whenever we have had a split Congress," Stovall said.

It turns out Mr. Market has more to say about our elected officials than most people would think.

"Wall Street typically worries about how politics might affect the stock market; perhaps presidential candidates should worry about how the stock market might affect their political outcome," noted Cathy Hetrick, a senior portfolio adviser at InvestTech.

Related Articles and News:

Join the conversation. Click here to jump to comments…

  1. DJ SPerry | August 28, 2012

    Don't believe the hype! We MUST get out and vote to ensure President Obama wins a 2nd term. Come on ppl it's time to do our part, VOTE. Remember NOTHING is guaranteed.

    • Someone | October 2, 2012

      Why must we ensure Pres. Obama gets re-elected? He has done a terrible job. He sucks as president. We MUST ensure obama does NOT get re-elected. He sucks.

  2. marioc | August 28, 2012

    Hello. My name is Mario from Ohio. I am African_American. I wouldn't vote for Obama for several reasons and would be proud to vote for Romney. I think Obama is one of the weakest Presidents in history. Not only is he not respected by his colleagues, no Leader over seas takes him seriously. If we had Hilary Clinton, or Romney we would have dealt with Syria, Iran, N. Korea with our military wrath and would not be negotiating with countries like Russia or China who make us look weak with their veto power. The United States is by far the United Nations. All the gold reserves are kept in America. When all the world leaders are summoned the come to America, and we are the only super power on earth. But China and Russia are defiantly gaining fast. I personally admonished Obama for support gay right and gay marriage. Not only is ot morally wrong, its spiritually wrong. Especially if you are a Chrisitan. Please read Romans 1 v. 21-27 Obama is clearly exchanging the truth for a lie. Thats not what a good President or Christian does. For many other reasons I am voting for Romney. And I am a Democrat but Obama is clearly the weaker canadate. I voted for Gore who was cheated out of the election, I voted for Hilary Clinton who was double teamed by the Democrats and Republicans because of Bill Clinton but Obama is too much like a figure head I'm sorry!

  3. Charles | August 28, 2012

    Go Obama!

  4. Toby | October 13, 2012

    Marioc- I live in Australia and travel a lot for work. Your perception of Obama's international standing isn't correct. In my life time I haven't seen an American president treated with so much respect internationally. This respect has resulted countries all through south east Asia (neighbouring australia) requesting American presence and influence. American presence had been rejected by the end of the bush terms. This enables America to hold strong strategic position with china.
    Look at the international polling for Obama vs Romney – Obama has a 80% favour ability internationally. This gives power to diplomacy.
    Sadly Romney will not command this level of respect.

Leave a Reply

Your email address will not be published. Required fields are marked *

Some HTML is OK