Will The Markets Predict Who Will Win the Presidential Election?

Monday, July 30, 2012 12:48
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Will The Markets Predict Who Will Win the Presidential Election?

One of the nation’s top historians of all things stock and bond markets is pondering whether a time-honored predictor of presidential elections will work this year.

Sam Stovall, the chief equity strategist for S&P Capital IQ, writes this week that many investors in his circles believe that if the S&P 500 should rise between July 31 and October 31, it would signal an impending victory by Presidential hopeful Mitt Romney.

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“The recovering market would be an indication that the perceived anti-Wall Street policies of the current administration will soon come to an end, as the incumbent would be replaced and that a plurality on the Potomac might even return as a result of the early November outcome,” Stovall writes. “Unfortunately for these presumptive prognosticators, history indicates (but does not guarantee) that the opposite has usually been true. Rising prices have typically signaled the reelection of the incumbent, while falling prices have pointed to his replacement, all to the tune of an average 82% accuracy rate over the past 100+ years.”

Obviously, we won’t know until later this year whether the market will rise or fall. And we won’t know until November whether Romney or President Barack Obama will win the White House.

But Stovall reports that Intrade.com is tracking the expected likelihood of either an Obama or Romney victory. Apparently, the correlation of a rolling 50-day moving average of President Obama’s numbers vs. the S&P 500, and Romney’s numbers vs. the market, confirm the premise of the predictor.

Writes Stovall: “For all of this year, the correlation of daily percent changes in the rolling 50-day moving average of poll results with the S&P 500 was 91% for President Obama, yet -31% for Romney (whose standing in the polls fluctuated greatly prior to winning the plurality of primary delegates). As the market’s 50-day moving average climbed, so too did the President’s average poll results, whereas the converse was true for the challenger.”

So what do advisors make of all this? Do they care? Do they plan to adjust their client’s portfolios because of what might happen in the markets and in the presidential election?

By and large, the answer is no. “It’s an interesting observation, but I’m not sure correlation should imply causation,” says Jason Lilly, CFA, CFP, the director of portfolio management at Rockland Trust’s Investment Management Group.  “I think the day-to-day developments in the Euro crisis, European Central Bank’s comments, U.S. economic data and Federal Reserve’s QE3 expectations have had a much greater effect on the markets.”

What’s more, Lilly thinks other factors will determine whether Obama or Romney win this November. “I suspect the U.S. budget ceiling, overall fiscal, regulatory and tax policy will decide the outcome of this year’s presidential election and that will affect the markets, but for now I believe the markets are preoccupied with global monetary policy,” says Lilly, who is a member of the Financial Planning Association’s Massachusetts chapter.

Another advisor is in the same camp. “In my experience, political events are highly uncertain and their consequences for the markets are even more difficult to predict,” says Larry Luxenberg, a partner with Lexington Avenue Capital Management. “A good example is the debt ceiling extension negotiations last August. Everyone I know of was predicting that if the U.S. got downgraded, interest rates would soar. Instead, U.S. government bonds have staged a huge rally over the past year.”

Luxenberg also says it’s also easy to interpret results in multiple ways as Stovall illustrates in the varying interpretations of the intrade.com polls.

So, given all that, Luxenberg is unlikely to make any adjustments to his client’s portfolios because of what the stock market may or may not be predicting. “With client financial affairs, we try to take a long-term outlook and make changes based on their individual circumstances as much as possible rather than the external situation,” he says. “Most of the academic research on investing and personal finance shows that this is the best way to maximize individual results.”

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