US Elections | Stock Market “Predicts” The Next US President
One Stock Market Indicator Pointing To A Romney Win
I have always wondered whether there is a link between the stock market and the US Presidential election result for option trading. Can the markets in any way “predict” who will be the next US president before the US election result in November?
Well, if history repeats, it seems there is a “statistical” way that we can predict who will be the next US president.
Before I go any further, let me say that I am NOT political and I have absolutely NO biases or affiliations to ANY political party. It does not matter to me who wins the next election.
The Stock Market Correlation
According to a study by the European Journal of Social Sciences (EJSS) there is an interesting correlation between the stock market and the actual election result. This was published in a paper titled The Stock Market and Presidential Election Polling.
Take a look at this table which shows how the stock market acted in the final month immediately before the election and the actual election result:
Every negative change in the stock market over the final month before an election in the past 80 years has resulted in a change in party. The analysis found that “every negative change in the stock market over the final month before an election in the past 80 years has resulted in a change in party.
A positive change tends to be good for the incumbent party, whereas a negative change makes the incumbent’s party vulnerable to losing.”
The stock market under analysis was the S&P 500 (SPX) (SPY), the index of the 500 largest companies in the world. The “incumbent party” in 2012 would be the Democrats under President Obama.
So let’s take a look now at how the stock market acted in the final month before the election, the period from 30th September to 1st November 2012 (i.e. October 2012).
Take a look at this monthly chart of the S&P 500 Index (SPX):
The S&P 500 index (SPX) closed on a negative in the month immediately before the election (as shown by the blue arrow).
The above chart shows that the stock market had a negative month in October (as shown by the blue arrow). The S&P 500 index closed at 1440.67 on September 30th 2012 and opened at 1412.20 on 1st November 2012 (the period measured by the Study). That is a 1.98% decline in the final month before the election.
Therefore if the analysis by the Study is correct, it would mean that since the stock market closed on a negative in the month of October 2012 – the final month before the elections – Obama’s presidency is vulnerable to losing.
So if history repeats, Mitt Romney will be the next US president.
The above data may not be altogether convincing. The EJSS admits that even though “it appears that downturns in the market have led to changes in the winning party… there is no statistically significant evidence for this” (my emphasis).
But is there other data which could support this conclusion? Maybe data from who is contributing the most to the individual candidates?
I recently came across this piece of information from a very useful website OpenSecrets.org which shows who are the top contributors to the presidential candidates, Barrack Obama and Mitt Romney.
According to Open Secrets, the top contributor to the Romney camp is Goldman Sachs (GS) with $994,139. It should be remembered that Goldman Sachs was Obama’s main contributor in the 2008 election (according to the Washington Examiner).
The correlation between the stock market and the US election results as found by the European Journal study is certainly interesting.
If Obama wins a second term in 2012, it will be the first time in 80 years that the correlation has failed.
Furthermore, will the fact that the majority of the big banks like Goldman Sachs and JP Morgan (JPM) are supporting Romney and not Obama play a significant factor in the election result? I cannot be sure.
In my view, the race and the outcome of the Presidential elections still remains open and a very close one. I cannot say that I have any idea who will win the election.
Let me know your own views about the above findings. Do you find any patterns or reasons that I have missed here? Do you find any of the finding discussed in this article convincing for option trading?
Courtesy of Alessio Rastani, http://www.alessiorastani.com