History has shown that a favorable 50-plus approval rating is pretty much a prerequisite for a president to get re-elected. Another time-tested path to the White House for the incumbent is to have the economy expanding and the jobless rate shrinking leading up to the election.
But what voters and investors might not know is that what happens to stocks on Wall Street in the two months leading up to Election Day may be the best predictor of who gets elected president, says James Stack, president of InvesTech Research.
The math basically works like this: If the Dow Jones industrial average goes up in the period from roughly Labor Day to Election Day, the incumbent president or party will likely retain control of the White House. If stocks head south in that key period, the challenger will likely stage an upset win.
In elections since 1900, the direction of the Dow has accurately predicted whether the incumbent party retains its grip on the presidency nearly 90% of the time. This barometer has been accurate 25 out of the past 28 times in the past 112 years, according to Stack's data.
"A lot of investors think the election or politics determine the outlook for the market," says Stack. "But there is a remarkable past link where the stock market appears able to predict who will win the White House."
The logic goes something like this: A rising stock market normally reflects investors' belief that the economic outlook is brightening. An improving economy often coincides with rising confidence among investors and voters, which boosts the odds of the incumbent winning.
For now, the edge seems to favor President Obama, as the Dow has skyrocketed 517 points, or 3.9%, since Sept. 4, helped in large part by an aggressive campaign by the Federal Reserve to get the economy moving again and spur job growth.
But Republican challenger Mitt Romney shouldn't be counted out. There is still a slew of economic data to be released prior to the election -- including the September and October jobs reports. There's also the specter of the looming fiscal cliff -- a potential growth-stunting combination of tax increases and spending cuts -- to turn the fledgling optimism about the economy back to pessimism.
In short, the election will be held hostage to fresh reads on the economy's health.
"We have 50 days to go," says Barry Knapp, head of U.S. equity strategy at Barclays. "The question is: Will we get any other additional catalysts to boost stock prices going forward?"
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