NEW YORK -- History has shown that a
favorable 50-plus approval rating is pretty much a prerequisite for a
president to get re-elected. Another time-tested path to the White House
for the incumbent is to have the economy expanding and the unemployment
rate shrinking leading up to the election.
But
what voters and investors might not know is that what happens to stocks
on Wall Street in the two months leading up to Election Day may be the
best predictor of who gets elected president, according to James Stack,
president of InvesTech Research.
The math
basically works like this: if the Dow Jones industrial average goes up
in the period from roughly Labor Day to Election Day, the incumbent
president or party will likely retain control of the White House. If
stocks head south in that key period, the challenger will likely stage
an upset win.
In fact, in presidential
elections since 1900, the direction of the Dow has accurately predicted
whether the incumbent party retains its grip on the presidency nearly
90% of the time. This barometer has been accurate 25 out of the past 28
times over the past 112 years, according to Stack's data.
"A
lot of investors think the election or politics determine the outlook
for the market," says Stack. "But there is a remarkable past link where
the stock market appears able to predict who will win the White House."
The
logic goes something like this: a rising stock market normally reflects
investors' belief that the economic outlook is brightening. And an
improving economy often coincides with rising confidence among investors
and voters, which boosts the odds of the incumbent winning.
For
now, the edge seems to be in favor of President Obama, as the Dow has
skyrocketed 517 points, or 3.9%, since Sept. 4, helped in large part by
an aggressive campaign by the Federal Reserve to get the economy moving
again and spur job growth. The Fed's launch on Thursday of its third
round of bond buying, dubbed quantitative easing, or QE, to keep rates
low to stimulate growth put the market in rally mode.
But
Republican challenger Mitt Romney shouldn't be counted at just yet.
There is still a slew of economic data to be released prior to the
election -- including the September and October jobs reports -- which
could dent confidence if they're lousy and cause stocks to turn back
down. There's also the specter of the looming fiscal cliff â?? a
potential growth-stunting combination of tax hikes and spending cuts --
to turn the fledgling optimism about the economy back to pessimism
again.
In short, the election will be held hostage to fresh reads on the economy's health.
"We
have 50 days to go," says Barry Knapp, head of U.S. equity strategy at
Barclays. "The question is: Will we get any other additional catalysts
(other than QE3) to boost stock prices going forward?"
Edward
Yardeni, chief market strategist at Yardeni Research, warns that the
Fed's moves won't solve all the economy's problems. "QE3 is not going to
solve the fiscal cliff," he says. "There's also a risk that the market
sells off on the realization that QE won't help the economy."
USA Today