The Key Swing Voter in the 2012 Election? Call Him Mr. Dow Jones

Election and the stock marketThis an election year, which means we are all faced with onslaught of political advertisements, prognostications, and endless poll numbers. Should candidates focus on values or the economy; foreign policy or domestic health care? Wading through all of it can be a difficult task for both candidates and voters.

But what if a look back at history showed that when it really comes down to brass tacks, there's only one thing that determines the outcome of a presidential election?

The single metric that has been astonishingly accurate at predicting the outcome of presidential elections has been the movement of the Dow Jones Industrial Average (^DJI) from Sept. 1 to Election Day.

Here's How Right the Dow Has Been

While there may not be an ironclad cause-and-effect relationship here, by going back and crunching the numbers, we see that of the 28 elections that have taken place since 1900, this simple metric has predicted the presidential winner an amazing 89.3% of the time (or 25 of the 28 elections).

Whenever the Dow is up over this time frame, the incumbent party wins. Whenever it's down, the incumbent party loses.

Year
Change (Sept.-Election Day)
Incumbent Party
2008
-20.2%
Lost
2004
-2.5%
Won
2000
-2.7%
Lost
1996
8.5%
Won
1992
-1.2%
Lost
1988
3.1%
Won
1984
2.6%
Won
1980
-1.3%
Lost
1976
-1.9%
Lost
1972
2.4%
Won
1968
3.1%
Lost
1964
3.5%
Won
1960
-2.1%
Lost
1956
-2.8%
Won
1952
-2.0%
Lost
1948
2.9%
Won
1944
3.0%
Won
1940
0.8%
Won
1936
6.3%
Won
1932
-20.4%)
Lost
1928
7.7%
Won
1924
1.1%
Won
1920
-1.9%
Lost
1916
13.3%
Won
1912
-1.1%
Lost
1908
0.4%
Won
1904
18.4%
Won
1900
4.1%
Won
Source: Analyzeindices.com

As for those anomalous years (marked in bold on the chart above), they can easily be explained away if you look more closely. In 1968, for example, the Democrats were in office and the Dow went up. But Lyndon Johnson had decided not to run for reelection and Bobby Kennedy -- the Democratic front-runner -- was assassinated after his California primary victory. The party was crippled following the drama of the Chicago convention that year.

Correlation, the Recency Effect, and Causation

So what's really going on here? Do stock market movements cause presidential election results, or are other variables at play? There's no tidy answer, but there are some interesting theories.

It's entirely possible that the market -- anticipating a change in power based on publicly available polling numbers -- discounts equities on the market to reflect the uncertainty associated with the coming change.

A strong case could also be made for the role of independent swing voters and what's called the "recency effect." This describes the common phenomenon in which people ascribe a disproportionate weight to the newest information we've received: In essence, whatever has just happened plays a larger role in our decision making than what occurred further in the past.

Casual observers can see the recency effect in action every college football season, as the national rankings -- which are determined by human votes -- tend to favor teams that had their only loss early in the season as opposed to in the final games of the year. In much the same way, it could be argued, voters are willing to ignore the previous three years and 10 months of a president's administration, and instead focus on his final two months.

If the Election Were Held Today ...

If the election were today, there's no question how our metric predicts the contest would turn out: President Obama would win. The stock market is up 4.1% since mid-January, and that's a very positive sign for any incumbent party.

But of course, the election isn't today, and just about anything can happen between now and November. If the economic recovery strengthens, unemployment continues to drop, and certain sectors -- especially manufacturing -- carry forth their recent gains, it would seem very difficult for Republican challengers to pose a serious threat.

If, however, the recovery falters, the price of gas weighs on growth, and the unemployed are largely unable to find new work, then Democrats could have a difficult time convincing the all-important swing voters that they have the remedies to cure our nation's economy.

Either way, the message is clear: When there are hundreds of topics for candidates to focus on during the election season, none seems to be more important than the direction of the economy after Labor Day.

You can follow Motley Fool analyst Brian Stoffel on Twitter at TMFStoffel.

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blackwhitemingle-com

Nice to be here.

March 16 2012 at 10:33 PM Report abuse rate up rate down Reply
blackwhitemingle-com

Its_the_place___blackwhitemingle___where_you_can_meet_singles_and _the_color_of_your_skin_is_not_a_problem!!

March 16 2012 at 10:33 PM Report abuse rate up rate down Reply
blackwhitemingle-com

Its_the_place___w__w_w.blackwhitemingle....c"o"m___where_you_can_meet_singles_and _the_color_of_your_skin_is_not_a_problem!!

March 16 2012 at 10:33 PM Report abuse rate up rate down Reply
bopaan

Under Obama’s policies, by contrast, we’ve just barely gotten back to where we were when the recession began. Unlike past recessions, we haven’t enjoyed a strong bounce. And this means we haven’t recovered the output that was lost during the downturn and that includes stocks.

March 16 2012 at 6:17 AM Report abuse rate up rate down Reply
nikita

there will be jobs loss ,'and shadow forclosures with 5 dollar a gallon gas in july!!
ireland , italy ,and greece are broke and the germans want out!!
arab spring,syria and the unrest of the countries getting worse!
good luck mr obama yor going to need it:)

March 16 2012 at 5:22 AM Report abuse rate up rate down Reply
nikita

there will be jobs loss ,'and shadow forclosures with 5 dollar a gallon gas in july!!
ireland , italy ,and greece are broke and the germans want out!!
arab spring,syria and the unrest of the countries getting worse!
good luck mr obama yor going to need it:)

March 16 2012 at 5:14 AM Report abuse rate up rate down Reply
nikita

there will be jobs loss ,'and shadow forclosures with 5 dollar a gallon gas in july!!
ireland , italy ,and greece are broke and the germans want out!!
arab spring,syria and the unrest of the countries getting worse!1
good luck mr obama yor going to need it:)

March 16 2012 at 5:13 AM Report abuse rate up rate down Reply
STEVE

The stock market went up a lot under Clinton & down a lot under Bush & up a lot under Obama .
The stock market & economy usually does much better with Democrat presidents than with
Republican presidents , according to long term studies. So, we should re-elect Obama &
then other Democrats .

March 15 2012 at 11:27 PM Report abuse rate up rate down Reply
2 replies to STEVE's comment
Mark Madden

the market did very well under bush jr. for the most part right now the only reason the market is doing any thing is because of the 0% interest rate there is no other place to put your money banks pay nothing t bills pay nothing where else are you going to put your money under your mattress

March 16 2012 at 3:46 AM Report abuse rate up rate down Reply
bopaan

Under Obama’s policies, by contrast, we’ve just barely gotten back to where we were when the recession began. Unlike past recessions, we haven’t enjoyed a strong bounce. And this means we haven’t recovered the output that was lost during the downturn

March 16 2012 at 6:17 AM Report abuse rate up rate down Reply
STEVE

The stock market went up a lot under Clinton & down a lot under Bush & up a lot under Obama .
The stock market & economy usually does much better with Democrat presidents than with
Republican presidents , according to long term studies. So, we should re-elect Obama &
then other Democrats .

March 15 2012 at 11:26 PM Report abuse rate up rate down Reply
lobwedge39

Looks real good for Obama. I think we all agree and all are happy.

March 15 2012 at 5:21 PM Report abuse +3 rate up rate down Reply