Stock market predicts Obama win. Or is it a loss?November 1, 2012: 12:50 PM ET
The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.
Good news for President Obama. Stocks have surged during his term in the White House. Historically, that should mean he will win re-election. Bad news for President Obama. The market has tumbled in the past month. And that could doom his chances for four more years at 1600 Pennsylvania Avenue.
It's hard to know if voters will choose to focus more on the 70%+ pop in the S&P 500 (SPX) since Inauguration Day 2009 or pull a Janet (Ms. Jackson if you're nasty) and ask "What Have You Done for Me Lately?" But a team of researchers do think that the stock market is a far better predictor of election outcomes than the unemployment rate or other economic indicators.
Matthew Lampert, the Socionomics Institute research fellow at the University of Cambridge, said that according to a study done by him and three others that looked at presidential re-election bids going all the way back to George Washington in 1792, it's rare for an incumbent to win a second term if the market tanked during his tenure.
He pointed to Herbert Hoover during the Great Depression and Martin Van Buren in 1840 as two prominent examples of one-term presidents who were in office while stocks were falling.
On the flip side, presidents tended to get credit for strong stock markets, noted Lampert. Ronald Reagan and Bill Clinton easily won their race for a second term in 1984 and 1996 respectively. And both of them were president during booming years for the stock market.
Lampert said Obama could benefit, just as Reagan and Clinton did. However, there is a key difference. When Reagan and Clinton were re-elected, it was widely thought that stocks were in the middle of a lengthy bull market. That's not so certain now.
With stocks having more than doubled from the bear market lows of March 2009, and concerns growing about the fiscal cliff and corporate earnings in the United States, as well as economic slumps in China and the recession in Europe, there are concerns that the best days for stocks are behind us.
It's possible that the October stock slide could herald the beginning of a prolonged downturn.
"Positive gains in the market should bode well for Obama but if people think this is just a bear market rally that could dampen his chances," Lampert said, noting that even for voters who don't own many stocks, the daily tape of market performance does tend to affect mood and sentiment.
Still, it's foolish to ignore the economy entirely. Jimmy Carter and George H. W. Bush were unable to return to the White House even though stocks were up during their tenure -- although they have not rallied as strongly as they have during the past three and a half years.
Like Obama, both of them faced extremely challenging economic problems: inflation for Carter and the saving-and-loan crisis for Bush. Of course, Carter and Bush also were hurt by foreign policy concerns -- the Iran hostage crisis and first Gulf War (which ultimately did not change much in Iraq) respectively.
Lampert also noted that this election seems to be more about the future, i.e. whether Obama or Republican presidential challenger Mitt Romney has a better plan to get out of the current economic malaise, than how the market and economy have done over the past few years. So investors may dismiss the huge rally since 2009 because they are more worried about what stocks will do in 2013.
But for that reason, one money manager said Tuesday's outcome is still a toss-up because he feels neither of the two candidates have what it takes to end the budget mess and political gridlock in Washington.
"It doesn't matter who gets elected. Investors don't have a favorable view of any part of the government," said George Feiger, CEO of Contango Capital Advisors in San Francisco. "They do not have high regards for Congress. There is considerable nervousness."