Earlier this year I wrote about the correlation between the stock markets and the presidential election. I began researching this in 2008. I looked at each of the US presidential elections and examined what was happening in the economy during the respective time. The mood of the stock market has a dramatic impact on who wins the election. We have determined that there is an 85% correlation between the economy and the election results. In 2008, the market began the year on a positive note, and later in the year, as we all know, it took a nose dive. The president at that time was George W. Bush. His approval rating at the beginning of 2008 was generally high, but it took a major hit starting with the stock market decline. During this period I started to study market trends and influences on our behavior. In the summer of 2008, I began communicating to friends that whoever ran against the incumbent’s party would win, if what I was learning held true. It didn’t matter who ran against John McCain, they would have a strong chance of winning. The trend played out in that election.
The following are some interesting, non-partisan observations about US history and elections during periods of economic turmoil. In 1856, James Buchanan (D) won the presidential election by 12%. An economic crisis began in 1857, and, in 1860, a once failed politician named Abraham Lincoln (R ) won by 10%; the presidency changed hands. During Lincoln’s presidency, an economic upswing (and the civil war) occurred.
In 1928, Herbert Hoover (R) won by 17%. In 1929 an economic crisis started, and, in 1932, Franklin D. Roosevelt (D) beat Hoover by 18%. An economic upswing (and WW II) took place during FDR’s presidency.
Jimmy Carter (D) won the presidency by 5% in 1976; an inflation crisis ensued during his term, and Ronald Reagan (R) won 91% of the electoral votes in 1980.
Fast forward to 2004; George W. Bush (R) won his second term by almost the same margin as Obama defeated Romney this year. In 2008, an economic crisis hit, and Barack Obama (D) defeats McCain (R) by 10%. Generally, one who is President during periods of economic crisis will be regarded by some as a poor president (Buchanan, Hoover, Nixon, Carter and Bush II). Alternatively, in periods of economic growth, the President during those times receives the credit (Washington, Lincoln, FDR, Reagan and Clinton). It is one of the most powerful technical trends of our time. As the stock market (general economy or at least the perception) goes, so goes the election. President Obama’s historical significance of how he will be deemed as President will be determined by what happens in the US economy, thus the stock market over the next 4 years, in this technician’s opinion.
In 2012, the stock market has had a decent return. I know many investors are skeptical about the market. We read about the turmoil every day when we pick up national newspapers. I have communicated on our website this year about the market climbing the “wall of worry”. When investors are bearish on the future, the market generally goes up over time. I know this trend is surprising to many people. The markets have a tendency to start major corrections when investors become complacent. This does not hold true 100% of the time, but, for example, complacency was at a high in 1999 and again in 2007. This year, we have communicated that we felt the DOW would reach 13,500-14,000, and it has. What is next?
The Federal Reserve announced QE3 in September. So far this has not had a positive result in maintaining an upward bias to the stock markets. October and November are typically the weakest periods for equities. This has played true the past eight weeks. Since the March 2009 stock market bottom, the market has gone through eight corrections during this 90% market uptrend. Six of these have been in the 7-10% range. We are currently in that range, yet again. I believe if the Dow fails to hold 12,000, the “storm” that I currently anticipate arriving in mid to late 2013, could be upon us earlier. Just as October-November has been historically poor for equity performance, Thanksgiving to the end of January has been very favorable. For the bulls to remain in charge and the uptrend to remain intact, this correction would be almost to an end. If, however, we have a weaker Holiday season for stocks, we will issue a stock market warning to our clients sooner rather than later.