After the US
Supreme Court inexplicably redefined Obamacare to
uphold its constitutionality, politics are very much back in the news. And
with the all-important US elections only 4 months away, it's only going to
get worse. Interestingly, the state of the US stock markets heading into
voting is likely to both predict and heavily influence the outcome. The
markets' impact on Americans' collective psyche is vast.
For most
investors and speculators, this is pretty obvious. When the stock markets are
up we feel more optimistic about everything, so we tend to spend more.
Economists call this the wealth effect. And when the markets are down we feel
more anxious and worried, so we pull in our horns. Not surprisingly, these
behavioral changes spawned by our rising and falling portfolios also carry
over into the voting booths.
When the stock
markets are strong so everyone feels better about the future, incumbents are
more likely to win. Americans perceive them as being somehow responsible for
the prosperity they are experiencing and expect to continue. But when markets
are weak everyone feels worse and wants things to improve. So the incumbents
tend to get booted out in favor of the challengers. The stock markets are the
key.
Provocatively
much hard data supports this thesis, it is somewhat
well-known among students of the markets. Back in February the same day I
published my original
essay in this series, another fascinating thread from a different
perspective also made news. InvesTech Research did
a study showing that stock-market performance has been the most reliable
indicator of who will win the presidency for over a century.
The
methodology was simple. InvesTech looked at the stock markets' performance in
the 2 months leading up to every US presidential election since 1900. Since
these elections are held on the Tuesday after the first Monday in November,
always early that month, this essentially means how the markets did in
September and October. This minor piece of data has correctly forecast nearly
9 out of 10 elections!
InvesTech found that if the stock markets
rally to gains in the 2 months leading into elections, the incumbent party
wins the presidency. And if the stock markets slump to losses in that
critical September-October period for shaping psychology, the incumbent party
loses. Out of the last 28 presidential elections, this simple indicator has
proven correct 25 times. This is an astounding 89% success rate!
Broken down
further, in 15 out of 16 times the incumbent party was re-elected to the
presidency when the stock markets rallied in those final two months before
voting. And in 10 out of 12 times when the stock markets fell in September
and October, the incumbent party lost. These are super-high correlations over
more than a century's worth of data, so this stock-market indicator has to be
taken very seriously.
While I sure
wish I had thought of InvesTech's elegant approach
first, my own took a different tack. I had noticed in recent years that
Obama's approval rating climbed when the stock markets were strong and
flagged when they were weak. But this was merely based on isolated anecdotal
observations, reading an article or listening to a news report here and
there. Was there any way to test it more thoroughly?
Thankfully
the elite polling organization Gallup
rode to the rescue. Essentially founded in 1935, it is now probably the
biggest and best polling operation in the world. Among the countless polls it
conducts, there is a daily one where Americans are asked whether they
approve or disapprove of the job Obama is doing. When this high-resolution
data is overlaid on the stock markets' performance, everything becomes clear.
Gallup's
daily job-approval and job-disapproval ratings for Obama are rendered on this
chart in green and red respectively. They are superimposed over the flagship
S&P 500 stock index (SPX) shown in blue. In general when the stock
markets are up, Obama's approval rating is high and his disapproval rating is
low. And the opposite is true when the stock markets are down. Voters are
heavily influenced by the SPX!
Starting in
2009, this chart covers both the whole post-stock-panic era and Barack
Obama's entire presidency. But the first year or so is largely irrelevant for
our purposes today. As we'd all like to forget, 2008 suffered a brutal once-in-a-century
stock panic. The SPX ended that year down a gut-wrenching 38.5%! So
regardless if you voted for Obama or McCain, we all desperately hoped for a
better 2009.
And Obama is
a super-impressive guy, overcoming all kinds of hurdles including his youth
and lack of experience to become the first African American president in US
history. He can give great speeches and inspire. I certainly didn't vote for
him because his politics scare the heck out of me (Marxist class warfare and
Socialist wealth redistribution), but he really had great potential to enhearten Americans.
So Obama
entered office riding an incredible honeymoon high. His approval ratings were
off the chart, while disapproval ratings were low. Even the 45.7% of American
voters who didn't want him were impressed by his charisma and sincerely hoped
he could lead us out of the post-panic malaise. This effect gradually faded
over the following year as reality set in, so early 2010 is the best place to
start.
After Obama's
honeymoon, as is usually the case his approval rating started to be heavily
correlated with the SPX. When the SPX surged to new post-panic highs, over
half of Americans approved of the job he was doing. But when the SPX sold off
in one of its periodic healthy corrections, Obama's approval rating collapsed
while his disapproval rating surged. This pattern has persisted for the
couple of years since.
Anytime the
SPX is near highs, such as in mid-2011 or early 2012, Obama's approval rating
climbed to 50%+ heights while disapproval moderated. The best example is
highlighted in this chart, the spring-2011 period when Obama's approval per
Gallup shot up around 53% while his disapproval fell near 40%. He looked
invincible then, destined to win another term. Why? Because stock markets
were faring well.
And the
opposite is true when the stock markets weren't doing well, following major
SPX selloffs. Last autumn after the SPX's sharp correction (which was
admittedly exacerbated by Obama's refusal to do a timely debt deal with
Congress), his approval rating plunged. It sunk all the way down into the 38%
range. And meanwhile his job-disapproval rating soared to 55%. Americans hate
weak stock markets.
Is it fair
that a sitting president gets credit when stock markets rally and blamed when
they sell off? Usually not. Occasionally some major political event comes
along like last year's debt-ceiling fight that directly impacts the markets,
but for the most part investors and speculators do their own thing regardless
of who is in power. But the buck stops at the president, so he is perceived
as presiding over everything.
And these
stock-driven psychological swings are massive in this closely-divided
country. Remember that all elections are effectively decided by the
independent voters in the middle. About 4/10ths of American voters are
conservatives who will always vote Republican, and the opposite 4/10ths are
liberals who will always vote Democrat. It is the 2/10ths in the middle, the
independents and swing voters, who decide elections.
And most
elections are won and lost by only a few percentage points, like 52% to 48%.
So seeing a president's job-approval and job-disapproval ratings swinging
from 40% to 55% and back based on the fortunes of the stock markets is huge.
This enormous range totally dwarfs the margins by which elections are always
decided. So obviously it really matters where the stock markets are
heading into voting.
If incumbents
(presidents, senators, representatives) are fortunate enough to have their
fate decided after the markets have rallied for a couple months and are near
major interim highs, Americans will be optimistic and much more likely to
keep them in office. But if election day happens to arrive after the markets
have sold off for a couple months, then Americans are pessimistic and want
new leadership.
These
valuable approval and disapproval ratings from Gallup looked at through the
lens of major stock-market uplegs and corrections
buttress InvesTech's approach. What the SPX does in
the September and October before an early-November election heavily
influences Americans' sentiment. Rallying markets make us feel good and like
our politicians, while falling ones bum us out so we kick the bums out.
So if you
want Romney to win this November, pray for a major stock-market slide between
now and election day. And the more that selling falls into September and
October, the better. Obama got hugely lucky in 2008. He was down in the polls
and an underdog for most of the summer, but then a
once-in-a-lifetime stock panic struck at the perfect moment. The SPX
plummeted 24.5% in September and October!
That is not
just a down stock market, it is a disaster. I don't think any incumbent, even
ones commanding legendary popularity like John Kennedy and Ronald Reagan,
could have won while facing such a fierce immediate psychological headwind.
It is amazing given the stock panic's ideal timing that Obama only won 52.9%
of the popular vote. That it wasn't a landslide shows just how polarized
Americans were.
While there
is no doubt in the hard data that the fortunes of the stock markets influence
Americans heavily, there is a big question. Why? It's obvious why
investors and speculators, people who watch the markets every day, are
influenced by their flowing and ebbing. But the majority of
Americans are not investors and speculators, and couldn't care less
about the stock markets' short-term gyrations.
So why are non-interested voters also influenced? I
suspect there are quite a few reasons across multiple fronts, but a couple
major ones come into play. They include media exposure and personal
relationships. No matter how little average Americans care about the stock
markets, they consume media that is obsessed with them and interact with
people intimately affected by their ongoing performance.
Everyone is
interested in the news to varying degrees, wondering what is happening on any
given day. And as they read articles and listen to reports, the stock markets
often come up. Any solid up day in the SPX is accompanied by optimistic and
positive reporting, as everyone considers rising stock markets to be a
bullish omen for the general economy. And of course the opposite is true on
any meaningful down day.
So the newsflow that people consume to shape their individual
sentiment is heavily colored by what happened in the stock markets that day.
And these trends compound over time. Late in a major upleg
Americans have been deluged with positive reports from many weeks of rallying
stock markets. So they feel good, optimistic about the future. When things
are going well there is little desire to change leaders.
And after a
couple months of selling in a correction, Americans have seen plenty of
negative and pessimistic reporting spawned by stock-market down days. After
enough of this, they naturally start getting worried and anxious. So they
start to look for a change in leadership to fix things, to improve the
economy and their own chances for success. If an election happens then, they
like to vote in new blood for change.
And remember
that the people reporting the news are not poor, and they have indirect
stock-market exposure through their retirement plans. So the media itself is
part of the investor class, happy when the stock markets are strong and
worried when they are weak. These innately-human biases
of reporters naturally spill into their work no matter how hard they try
to be objective. And many don't even try.
Personal
relationships are the second biggest reason the SPX is so influential after
media exposure. About 90% of Americans work in the private sector. And of
course the companies that employ them need to earn profits by making sales.
Since the stock markets drive such a huge wealth effect, people spend more
when they are doing well and less when they aren't,
sales naturally follow the stock markets too.
When sales
are weak, owners and managers get anxious and worried. Their employees can't
help but notice this pessimistic bias and quickly internalize it as their
own, even if they don't know the exact cause. They too grow increasingly
nervous, fearing for their jobs if operations are cut back to bring costs
back in line with reduced revenues. So employees are indirectly influenced by
the stock markets.
These
relationships extend into our personal lives too. We all frequent businesses
to buy the goods and services we need and want. Many of these are small
businesses. Sales are the lifeblood of small business, and when you visit one
there are often clues about how business is going. When it is well, more
likely in up markets since Americans spend more, the vibe is usually positive
and optimistic.
And the
opposite is true when business is slow. When we see businesses we patronize
appear to be struggling, we start worrying about the economy too. In
addition, the majority of Americans probably have close personal friends who
are small businessmen or investors. So when they talk to these friends who
are influenced by the state of the stock markets, some of these views
naturally rub off on them as well.
One of the
most famous political phrases in modern history was created by Bill Clinton's
notorious campaign strategist James Carville. "It's the economy,
stupid." This slogan helped unseat Bush the Elder as Americans were
worried about a weak economy. We really do vote our pocketbooks, and
strong stock markets make us feel secure while weak ones make us feel
anxious. Elections reflect this.
There is a
high probability that the state of the stock markets heading into early
November will decide the US elections this year. We like to think we have a
choice between pro-big-government Obama and pro-free-market Romney, and we
do. But we Americans are so heavily influenced by the stock-market fortunes
in a variety of ways that we generally aren't even aware they're often
dominating our sentiment.
The future
path of our country hangs in the balance, and the stock markets could
effectively decide its fate! So if there was ever a time to get up to speed
on the markets, what is happening and what is likely to happen, now is it.
We can help you do that, as studying the markets in order to launch
profitable trades is what we do at Zeal. And they are almost certain to be
incredibly interesting over the coming 4 months.
We publish
acclaimed weekly and monthly subscription
newsletters loved by speculators and investors worldwide. In them I draw on
our vast experience, knowledge, wisdom, and ongoing research to explain what
the markets are doing, why, where they are likely heading, and how to trade
them with specific stock trades as opportunities arise. Subscribe today, get prepared for the opportunities these elections
bring!
The bottom
line is the short-term fortunes of the US stock markets nearly always
determine the outcome of our presidential elections. When the markets are up,
Americans feel optimistic and are more likely to give the incumbents more
time in power. And when the markets are down, we get pessimistic and want to
give the challengers a chance to improve things. This has proved true for
over a century now.
Nothing influences
our collective national psychology more than the state of the stock markets.
This is even the case for Americans who don't directly invest due to media
exposure and personal relationships with those affected by the markets.
Americans are going to vote their pocketbooks this autumn as always, and how
they feel about the economy and their futures will be heavily colored by how
stocks are faring.
Adam Hamilton,
CPA
July 06, 2012
So how can you
profit from this information? We publish an acclaimed monthly newsletter, Zeal Intelligence, that details exactly what we are doing in terms of
actual stock and options trading based on all the lessons we have learned in
our market research. Please consider joining us each month for tactical
trading details and more in our premium Zeal Intelligence service at … www.zealllc.com/subscribe.htm
Questions for
Adam? I would be more than happy to address them through my private
consulting business. Please visit www.zealllc.com/adam.htm for more information.
Thoughts,
comments, or flames? Fire away at zelotes@zealllc.com. Due to my staggering and perpetually increasing e-mail load, I
regret that I am not able to respond to comments personally. I will read all
messages though and really appreciate your feedback!
Copyright 2000
- 2012 Zeal Research (www.ZealLLC.com)
|