What the Stock Market Shows About the Election—Maybe

By James Fallows

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.

This article available online at:

http://www.theatlantic.com/politics/archive/2012/10/what-the-stock-market-shows-about-the-election-maybe/264117/