Earlier this year, Professor Robert Prechter, founder of Elliot Wave International, published a study titled Social Mood, Stock Market Performance and U.S. Presidential Elections: A Socionomic Perspective on Voting Results.

Here's a quick summary of Prechter's findings:

The results are consistent with socionomic voting theory, which includes the hypotheses that (1) social mood as reflected by the stock market is a more powerful regulator of re-election outcomes than economic variables such as GDP, inflation and unemployment and (2) voters unconsciously credit or blame the leader for their mood.

It's all pretty intuitive.

However, Prechter's study did include one interesting nugget of information. Specifically, he found that big moves in the stock market are correlated with "landslide" wins during presidential elections.

"Socionomic theory proposes that more extreme changes in social mood tend to motivate more extreme voting preferences for or against the leader," wrote Prechter.



From Prechter's study:

We look first at landslide victories as measured by electoral vote margins. Records of electoral votes extend farther back in time than popular vote tallies, and thus provide more data points to test. To define extreme conditions operationally, we deem an election a landslide victory if the incumbent competed for and won re-election by defeating the nearest competitor with an electoral vote margin of 40% or greater. We deem the election a landslide loss if the incumbent running for re-election trailed the winner by an electoral vote margin of 20% or greater. We define a large positive stock market change as a net gain of 20% or more in the preceding three-year period, and a large negative stock market change as a net loss of 10% or more. We choose asymmetric percentage thresholds for electoral vote margin and net stock market change (i.e., {+40%, -20%} and {+20%, -10%}, respectively) to be consistent with the a priori positive biases in both data series: Historically, an incumbent has a better than 50% chance of re-election, and the stock market tends to have a positive trend.

...

We conclude that a large net positive stock market change during the three years prior to the election is highly likely to be associated with a landslide victory for the incumbent as opposed to a landslide loss, and a preceding large net negative stock market change is highly likely to be associated with a landslide loss for the incumbent as opposed to a landslide victory. The stock market movements and election results shown in Figure 1 illustrate this association visually.

Prechter makes no direct reference to Barack Obama's presidency. However, three years ago, the S&P 500 was at around 1,040. Three years since then, the S&P has rallied by around 35 percent, which is much higher than Prechter's 20 percent threshold.

Thi bodes well for Obama.

At least that's what the stock markets are telling us.



You can download Prechter's study SSRN >





