Presidents and the Stock Market

Yesterday, fellow Fool Morgan Housel came out with a brilliant piece on the correlation between the unemployment rate and the chances an incumbent (or his party) will be re-elected.

You would think that if a president has lowered unemployment rates, the chances for re-election would be high, and vice versa. Alas, Morgan cites evidence from statistician Nate Silver -- who culled evidence from as far back as 1912 -- to conclude: "There's virtually no correlation between the unemployment rate on Election Day and an incumbent's chance of winning."

Morgan is able to point out one possible reason for the weak correlation: "The average voter in the last two elections ... has not been representative of the broader economy. They've been in much better financial shape than the average American." In other words, unemployed people are less likely to head to the polls; their wealthier counterparts are far more likely to make their voices heard.

Knowing this, I think there's an even better and more accurate way to find a link between re-election and the economy: the behavior of the Dow Jones Industrial Average (INDEX: ^DJI  ) . Take a look, and you'll see that as far back as the election of 1900, the movement of the index between Sept. 1 and Election Day has successfully predicted the winner almost 90% of the time, with gains working in favor of the incumbent party and losses favoring the challenger. (Years in which the opposite occurred are italicized.)

Year

DJI Change from Sept. 1 to Election Day

Winner

Party

Did Market Predict Winner?

2008 (20.2%) Obama Democrat Yes
2004 (2.5%) Bush Republican No
2000 (2.7%) Bush Republican Yes
1996 8.5% Clinton Democrat Yes
1992 (1.2%) Clinton Democrat Yes
1988 3.1% Bush Republican Yes
1984 2.6% Reagan Republican Yes
1980 (1.3%) Reagan Republican Yes
1976 (1.9%) Carter Democrat Yes
1972 2.4% Nixon Republican Yes
1968 3.1% Nixon Republican No
1964 3.5% Johnson Democrat Yes
1960 (2.1%) Kennedy Democrat Yes
1956 (2.8%) Eisenhower Republican No
1952 (2%) Eisenhower Republican Yes
1948 2.9% Truman Democrat Yes
1944 3% Roosevelt Democrat Yes
1940 0.8% Roosevelt Democrat Yes
1936 6.3% Roosevelt Democrat Yes
1932 (20.4%) Roosevelt Democrat Yes
1928 7.7% Hoover Republican Yes
1924 1.1% Coolidge Republican Yes
1920 (1.9%) Harding Republican Yes
1916 13.3% Wilson Democrat Yes
1912 (1.1%) Wilson Democrat Yes
1908 0.4% Taft Republican Yes
1904 18.4% Roosevelt Republican Yes
1900 4.1% McKinley Republican Yes

Source: Analyzeindices.com; Google Finance.

One could easily argue that in 1968, the withdrawal of President Johnson, assassination of Robert Kennedy, and ensuing mayhem at the Democratic National Convention in Chicago could explain away at least one instance where the market didn't predict the winner.

One could also argue that in 2004, a shrewd move by Karl Rove to put same-sex marriage amendments on the ballots of swing states -- thereby driving social conservatives disproportionately to the poll -- could offer up an explanation for the second aberration.

But whether or not certain instances can be explained away, one thing is clear: There is a high correlation between the movement of the markets immediately preceding an election and the chances that the incumbent party will win.

Going back to Morgan's point -- that the voting population is usually skewed toward those with employment and higher incomes -- this makes sense. The market is a forward-looking tool: A rise represents optimism, and a fall, pessimism.

While this might not tell us who has the upper hand right now, it lets us know that both President Obama and Mitt Romney will be on the clock starting in three months, and the movements in the market will likely let us know who will be sitting in the Oval Office come January 2013.

Interested in more? Check out The Motley Fool's special report: "These Stocks Could Skyrocket After the 2012 Presidential Election." It's totally free -- just click here.

Fool contributor Brian Stoffel acknowledges that correlation is not causation, and there are millions of lurking variables to take into consideration that go far beyond the purview of this article. You can follow him on Twitter, where he goes by TMFStoffel.

The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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