(By Rich Bieglmeier) Many words have been written, and hours spent researching the affect the presidential election cycle has on the stock market's performance. It a nut shell, the market struggles in year one and two, year three is the best performer (not the case in 2011), and the fourth year is solid but not as strong as the third year.
The cycle makes sense if you think about it, especially in the case of a new President. In the first year, Wall Street and Main Street are unsure what impact new policies will have, so uncertainty weighs more heavily than in later years, restricting upside. By year three, everybody knows what to expect and policies geared towards re-election are in full bloom. The uncertainty cycle begins to rebuild as November elections approach in year four, wash rinse and repeat.
Looking backwards is always easy, 20/20 as it is said, but what, if anything, does the stock market's performance say about future elections? Does the stock market act as a political fortuneteller for incumbents?
According to a study titled SOCIAL MOOD, STOCK MARKET PERFORMANCE AND US PRESIDENTIAL ELECTIONS, the answer is an emphatic yes.
The researchers found "that social mood as reflected in the stock market is a powerful regulator of re-election outcomes and that voters unconsciously credit or blame the leader for their mood."
The math says "that the equity market's performance for ten months prior to an election was a better predictor than GDP growth" for picking the next President. The study argues that the stock market is the most sensitive measuring stick of the country's mood. As the collective attitude swings towards optimism, it translates into higher stock prices almost instantly through buying. The same goes for when people are unhappy, stocks get popped on pessimism.
Generally speaking, an up stock market from November 1, year one, to October 31, year four, means the incumbent gets re-elected. Congratulations Mr. Obama on your second term.
Before Romney supporters get mad, wait a minute, wait just a minute, this year could be different. If the market measures the "social mood" and stocks are rising, wouldn't you expect individual investors, actual voters and not computer models, to be putting money in the market? Seems intuitive, right?
According to data from the Investment Company Institute, investors have taken money out of equity mutual funds for 12 straight months and have withdrawn more than $6.6 billion so far in May. Since May of 2011, investors have taken more than $200 billion out of US based equity mutual funds. A sign that they are not optimistic about the market's upside potential for the rest of 2012.
When you balance performance and outflows, either man can win, which is in-line with recent polls.
Finally, if you want to invest in your candidate of choice, you can do so at intrade. The online prediction market allows binary yes or no bets. As of this writing, Obama shares are trading at $5.99 and Romney shares at $3.64. The winner's shares will be worth $10 and the loser's $0 when the election results are official.
Investors worried about the downside in the stock market could use Mitt's stock as an inexpensive hedge. If SOCIAL MOOD, STOCK MARKET PERFORMANCE AND US PRESIDENTIAL ELECTIONS's conclusion is correct, if the market falls, Mitt Romney's price should rise.
Obama fans might think about November index call options. If bulls help push the President over the November 6 finish line, the market and your options should be considerably higher.