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What the markets say about the election (and vice versa)

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If you live in a swing state, you’re probably ready to have this election over just to get all those nasty political ads off your TV. The good news is that a serious investor might not even have to wait until November 6th to find out who’s going to be our next president.

All you have to do is look at the direction of the S&P 500. If the S&P 500 rises in the three years prior to Election Day, the incumbent party is likely to win reelection, according to a study by a consortium of professors and two researchers from the Socionomics Institute. One of the professors said the three-year returns of the S&P were “the best single predictor of presidential re-election results.”

In 1996, Bill Clinton was re-elected after the Dow rose 63.8 percent in the three years prior to the election. Since mid-October 2009, the Dow has risen 34.8 percent, which looks like a real positive for the Obama campaign, although it isn’t quite as strong as most of the numbers that have historically returned incumbents to the White House.

Another study, from S&P Capital IQ, looked at a narrower time frame and found similar results. They compared the returns for the S&P 500 over the three months prior to the election, from July 31 to October 31, and found that it too was a good predictor of whether the party in charge would retain the White House. The S&P has dropped eight times in that three-month stretch before a presidential election since 1900, and the party in power has lost the election seven times. The only president to escape such a fate was Dwight Eisenhower in 1956, who won despite the fact that the S&P 500 fell 7.7 percent during this three-month period. This year, the S&P 500 is up about 4 percent since July 31, which again suggests an Obama victory on November 6.

Oddly enough, the stock market seems to be the only economic indicator that can consistently make such successful predictions. The Socionomics researchers also tried to see if inflation and unemployment had any impact on the outcome of a presidential election. Neither of them worked as a successful predictor. Economic growth was a significant predictor of elections, but its performance was not as reliable as the Dow.

Socionomic voting theory proposes that social mood affects behavior. The stock market, with numbers that are reported every day and are often considered a proxy for the country’s economic health, has a strong effect on the voters’ mood, even those who don’t own stocks. As a result, voters supposedly credit their political leaders for their good mood.

Another new study, “The Value of the Revolving Door: Political Appointees and the Stock Market,” might be able to help you get a leg up in the post-election stock market, no matter which party takes control of the White House. The study finds that political appointees who make use of Washington’s infamous revolving door tend to boost their company’s stock price.

The authors of the study, Swiss economists Simon Luechinger and Christoph Moser looked at defense contractors and Department of Defense appointees over six presidential administrations, from George H.W. Bush Sr. to Obama, and looked at what happened when executives moved from private industry to the executive branch, and vice-versa.

The study found that stock prices moved up by nearly 1 percent when former executives received political appointments. The returns were even bigger when they involved board members or those with top pay-grades in the Department of Defense. There was a similar effect when former administration members took positions with private companies; those companies’ stocks showed a slight increase as well.

The beauty of this study is that it’s possible to make use of it no matter which party wins the White House: When an executive leaves a company for a government post, the company’s stock goes up, so in the event of a Romney win, it would be wise to keep an eye on who’s filling his cabinet. At the same time, a company’s stock also goes up when it recruits executives from a government post. So the inevitable second-term turnover, in the event of an Obama victory, would be worth watching as well.

Finally, there has been a fair amount of buzz that a Romney victory might be a big boost to the market. The veteran stock watcher Mark Hulbert, writing for MarketWatch, took a look at that however, and found that there was historically very little movement in the market when an upset candidate won a presidential election.

More to the point for this election, Hulbert found that the betting site Intrade saw a big drop in Obama’s odds to win the election, dropping from 78.9 percent on September 29 to 59.7 percent earlier this week. Such a slide in the president’s fortunes might figure to be good for the market, if there was anything to the Romney buzz. But over that time, the Dow Jones fell right along with Obama, losing about half of a percent.

For more from Tom Nawrocki, see:

Black Monday: Could it happen again?

The warning signs in earning season

The tales of 9 stocks that doubled


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