What the Stock Market Shows About the Election—Maybe

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Political lore is full of "laws" and axioms about what's destined to happen this year. There's the Redskins Rule. Short version: Obama had better root for the Redskins, and Romney for the Panthers, when they meet nine days from now. There's the Unemployment Rate rule. Short version: Obama has already lost, since no president in the post-Depression era has been reelected with unemployment as high as it is now. There's the Incumbent Rule, which says that incumbents are very hard to beat unless they're challenged in their own party's primaries (Carter by Teddy Kennedy in 1980, GHW Bush by Pat Buchanan in 1992) and face a serious third-party candidate in the general election (again Carter, with John Anderson, and GHW Bush with Ross Perot) . You can think of sixteen more laws and rules, and soon enough we'll be in a position to adjust based on this year's results. [Update: I should have known that XKCD would have a very shrewd look at such laws. Thanks to BG in China.]

Here is a seventeenth -- or, whatever the number should be, an interesting additional correlation. A social-scientists' paper, published early this year while the Republican primaries were still being fought out, says there is an economic correlation with political results that is far more powerful than the unemployment rate. That correlation is with the change in the stock market's value during a president's term. Here is the correlation the authors find, with translation below:

StockMarket.png

What this means: In simplest terms, the study says that if the stock market goes way up, the incumbent president wins -- and the bigger the rise, the bigger the win. If the market goes way down, the president loses -- and the bigger the decline, the bigger the loss. The authors argue that the predictive value of this factor is greater than that of the unemployment rate or other usual measures. In 11 of the 12 cases in which the stock market rose by more than 20 percent in a president's first term, that president went on to a big win.

You should, again, go to the paper for the details. But as it applies to the current race? The paper covers stock-market rises in the three years before an election -- essentially, from early November of a president's first year to election day. Here's how that pattern looks for Barack Obama.

StockMarketObama.png

On November 2, 2009, the Dow Jones industrial average was 9712.13. At yesterday's close it was 13103.68. That's an increase of about 35 percent. Yes, this particular graph makes the stock-market rise look bigger than it should, because its vertical axis starts not at 0 but at 9000-something. It's the graph I happened to find at the moment, and even after allowing for graphical distortions the rise is significant. According to this law, Obama should be heading for a big win, at least in electoral college terms. One more hypothesis to test.
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James Fallows is a national correspondent for The Atlantic and has written for the magazine since the late 1970s. He has reported extensively from outside the United States and once worked as President Carter's chief speechwriter. His latest book is China Airborne. More

James Fallows is based in Washington as a national correspondent for The Atlantic. He has worked for the magazine for nearly 30 years and in that time has also lived in Seattle, Berkeley, Austin, Tokyo, Kuala Lumpur, Shanghai, and Beijing. He was raised in Redlands, California, received his undergraduate degree in American history and literature from Harvard, and received a graduate degree in economics from Oxford as a Rhodes scholar. In addition to working for The Atlantic, he has spent two years as chief White House speechwriter for Jimmy Carter, two years as the editor of US News & World Report, and six months as a program designer at Microsoft. He is an instrument-rated private pilot. He is also now the chair in U.S. media at the U.S. Studies Centre at the University of Sydney, in Australia.

Fallows has been a finalist for the National Magazine Award five times and has won once; he has also won the American Book Award for nonfiction and a N.Y. Emmy award for the documentary series Doing Business in China. He was the founding chairman of the New America Foundation. His recent books Blind Into Baghdad (2006) and Postcards From Tomorrow Square (2009) are based on his writings for The Atlantic. His latest book is China Airborne. He is married to Deborah Fallows, author of the recent book Dreaming in Chinese. They have two married sons.

Fallows welcomes and frequently quotes from reader mail sent via the "Email" button below. Unless you specify otherwise, we consider any incoming mail available for possible quotation -- but not with the sender's real name unless you explicitly state that it may be used. If you are wondering why Fallows does not use a "Comments" field below his posts, please see previous explanations here and here.
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