An article in the October edition of SFO Magazine (http://sfomag.com) caught my attention recently. It outlined, with charts, graphs, and text, the stock market scenarios for Octobers leading up to elections and offered the Dow Jones Industrial Average as a prediction tool.
In six out of eight presidential election years in which the Dow was down for the month of October - and it is down this month and heading lower today - the incumbent (that would be George Bush this year) lost. Not only is that a solid 75% hit rate, but the greater the loss on the Dow, the more reliable the indication.
According to one chart in the article, the only times the incumbent won when the Dow was down were the two smallest declines (1944, Roosevelt defeated Dewey, Dow down 0.1%; and, 1964, Johnson defeated Goldwater, Dow down 0.3%). The other six times in which the Dow slipped were greater losses, spelling defeat for the incumbent.
The most recent incarnations of this phenomenon are 1976 (Carter defeated Ford), 1980 (Reagan over Carter) and 1992 (Clinton defeated Bush). The 2000 election, in which Republican challenger George W. Bush won a narrow victory over Al Gore and the incumbent-party democrats, the Dow was up a solid 3% in October, one of only four times out of seventeen in which the Dow was up and the incumbent party lost. No system is perfect, but this one hits at a 75% or better rate and there are still plenty who believe Gore actually won in 2000, so there's more grist for that grindstone.
It does make some rational sense that the markets would turn lower sensing a change in the White House. Markets hate uncertainty, and even suspected change at the top, might engender some selling and profit taking. Juxtaposing the argument, the markets being down, i.e., a slowing or sluggish economy, may prompt a dumping of the chief executive.
Conversely, if the markets are strong and the economy flourishing, there's no need to make a change at the top, ergo, the incumbent sits pretty.
So, is the stock market telling us something many already suspect: that the economy is not so hot, that there are concerns over the current administration's ability to lead? Looks like it, and if the downward trend of the Dow continues (around 9870 at noon on Oct. 18, just over a 2% decline from the closing price of 10080.27 on Sept. 30), we may be waving another president bye-bye after a single term.
Forget the polls, just keep an eye on the Dow.
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