NEW YORK -- History has shown that afavorable 50-plus approval rating is pretty much a prerequisite for apresident to get re-elected. Another time-tested path to the White Housefor the incumbent is to have the economy expanding and the unemploymentrate shrinking leading up to the election.
Butwhat voters and investors might not know is that what happens to stockson Wall Street in the two months leading up to Election Day may be thebest predictor of who gets elected president, according to James Stack,president of InvesTech Research.
The mathbasically works like this: if the Dow Jones industrial average goes upin the period from roughly Labor Day to Election Day, the incumbentpresident or party will likely retain control of the White House. Ifstocks head south in that key period, the challenger will likely stagean upset win.
In fact, in presidentialelections since 1900, the direction of the Dow has accurately predictedwhether the incumbent party retains its grip on the presidency nearly90% of the time. This barometer has been accurate 25 out of the past 28times over the past 112 years, according to Stack's data.
"Alot of investors think the election or politics determine the outlookfor the market," says Stack. "But there is a remarkable past link wherethe stock market appears able to predict who will win the White House."
Thelogic goes something like this: a rising stock market normally reflectsinvestors' belief that the economic outlook is brightening. And animproving economy often coincides with rising confidence among investorsand voters, which boosts the odds of the incumbent winning.
Fornow, the edge seems to be in favor of President Obama, as the Dow hasskyrocketed 517 points, or 3.9%, since Sept. 4, helped in large part byan aggressive campaign by the Federal Reserve to get the economy movingagain and spur job growth. The Fed's launch on Thursday of its thirdround of bond buying, dubbed quantitative easing, or QE, to keep rateslow to stimulate growth put the market in rally mode.
ButRepublican challenger Mitt Romney shouldn't be counted at just yet.There is still a slew of economic data to be released prior to theelection -- including the September and October jobs reports -- whichcould dent confidence if they're lousy and cause stocks to turn backdown. There's also the specter of the looming fiscal cliff â?? apotential growth-stunting combination of tax hikes and spending cuts --to turn the fledgling optimism about the economy back to pessimismagain.
In short, the election will be held hostage to fresh reads on the economy's health.
"Wehave 50 days to go," says Barry Knapp, head of U.S. equity strategy atBarclays. "The question is: Will we get any other additional catalysts(other than QE3) to boost stock prices going forward?"
EdwardYardeni, chief market strategist at Yardeni Research, warns that theFed's moves won't solve all the economy's problems. "QE3 is not going tosolve the fiscal cliff," he says. "There's also a risk that the marketsells off on the realization that QE won't help the economy."