Will Obama win in November? New study says, 'Ask the stock market'

During this topsy-turvy primary season, most pundits are focused on who will win the Republican presidential nomination.But a landmark new study challenges the conventional wisdom about which factors truly motivate voters in presidential elections. "Social Mood, Stock Market Performance and U.S. Presidential Elections" by Robert Prechter, Deepak Goel, Wayne Parker and Matthew Lampert, found that whomever the GOP nominates may not matter much with regard to President Obama's re-election prospects in November. And neither does the economy-as measured by jobs, growth or even inflation. "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 Goel. "Changes in stock prices had a positive, substantial and statistically significant association with incumbents' performances in re-elections. We found that they accounted for more than a quarter of the variation in incumbents' popular vote margins." The researchers studied every presidential re-election campaign in U.S. history 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. Meanwhile, the relationship between how an incumbent performs and the changes in gross domestic product, inflation and unemployment is weaker and, with the latter two, "often insignificant," according to the authors. The study, posted on the Social Science Research Network (SSRN), acknowledges that a few incumbents were re-elected when the markets had declined and a few others were defeated when the markets had risen. But those margins of victory and defeat were smaller on average than when the direction of the markets and the incumbents' fates matched. Matthew Lampert, a Research Fellow of the Socionomics Institute and doctoral candidate at the University of Cambridge, says one of the study's purposes is to address popular opinion surrounding elections. "We often hear people debate which presidential candidate will be better for the stock market," Lampert said. "Our study comes to a different conclusion: that there is significant predictability in the opposite direction." The researchers also checked the measures that most analysts believe matter to voters, namely gross domestic product (GDP), inflation and unemployment. As it turns out, "Inflation and unemployment had no predictive value in any of our tests," said statistician Goel. "GDP was a significant predictor in some of the simple models, but it was rendered insignificant when we combined it with the stock market in multiple regression analyses. In contrast, the stock market was a consistent indicator of re-election outcomes." The authors addressed the question of whether investors voted for or against incumbents simply because they made or lost money in stocks. "If rational self-interest were the basis for our results, then GDP and unemployment should have mattered at least equally," said Prechter. "But they don't." Moreover, he said, "We contrasted eras when stocks were widely owned vs. hardly owned, and there was no difference in results." Lampert concluded, "We think that the best explanation is that the trend of social mood is important in driving the valuations of both stocks and presidents." The findings are an important contribution for those who create elections forecasting models. "We demonstrated a counter-intuitive point about what matters, what doesn't and why," Prechter said. The study also suggests a strategy for incumbent presidents. "An incumbent who has held office during a major setback in social mood may wish to consider declining to run for a second term and await more favorable conditions to pursue the presidency again," the report says. In other words, if the Dow keeps soaring, President Obama can campaign with a smile. But if the Dow tanks, he might want to forgo the 2012 election. Contributed by The Socionomics Institute

********** Published: February 23, 2012 - Volume 10 - Issue 45