Is the Stock Market Signalling a Winner in Tuesday’s Election?

A veteran journalist asked me this week whether the stock market was signalling an outcome in Tuesday’s election. In my view, the stock market is more focused on the future of Chairman Bernanke than the difference between President Obama and Governor Romney. After all, this rally in the market is almost entirely due to Bernanke’s Quantitative Easing. So the stock market, I told him, is reacting mainly to the possibility of Bernanke being replaced by a more hawkish Fed Chairman in 2014. (That is why, I think, the stock market sold off on Friday despite a stronger than expected jobs number and why Gold & Silver cratered. )

But my friend, a distinguished editor/reporter who has covered the last 6-7 Presidential elections, was neither impressed nor satisfied with my comments. So I began looking for a message of the stock market. Frankly, I was not interested in a random guess or a casual opinion. I was looking for an answer based on a process, preferably one with a track record.

On Friday, I finally found it. The analysis I describe below is based on the “interrelationship of the stock market and the polling data“. And according to its creator, the technique has been “used for each of the past 3 presidential elections to correctly forecast the outcome of the popular vote“.

The analyst I speak of is the famous Tom McClellan, the man who invented/created the widely used McClellan Oscillator. I urge you to read his entire article titled My Final Pre-Election Forecast on his site Below are a few excerpts:

  • “My theory about this is that both the stock market and the polling
    numbers are a reflection of public mood.  If the public is in a bad
    mood, then they tend to sell their stocks, and they also tend to not
    like the guy who is in the White House.  If mood improves, then they bid
    up stock prices, and they like the president (or his party) more.
  • But it is all working backwards this year, as this week’s chart helps to
    illustrate.  This time, market rallies seem to help Governor Romney a
    week later, and selloffs seem to move the poll numbers in President
    Obama’s favor.  I do not have a good theory to explain why it is working
    backwards this time; I just am seeing what’s happening.”

In his article, Tom McClellan discusses the impact of Hurricane Sandy and the suspension of daily polling by Gallup. Then he writes:

  • “Now that we have the stock market back open again after the two-day
    closure due to Hurricane Sandy, we can once again receive its
    information about how the poll numbers should move after that one-week
    delay.  But now we have a new problem, which is that the stock market
    has not really traded “normally” in the wake of Hurricane Sandy.  So how
    good is its leading indication for the poll numbers?  That’s a tough
    question to answer.”

Hurricane Sandy mainly hit New York and New Jersey. These states were expected to be Obama states anyway. So will Sandy affect the electoral college numbers or the popular vote?

  • “Usually I use this relationship of the stock market and the poll
    numbers to forecast what the popular vote will do, but the popular vote
    this year could see a big effect on voter turnout from Hurricane Sandy. 
    The electoral college vote is unlikely to be affected, since the most
    hard-hit states were along the east coast where President Obama still
    has a strong state-by-state lead.  So even if fewer voters from New York
    and New Jersey turn out to vote, those states will still contribute the
    same number of electoral college delegates that they would if the
    turnout were higher.  But counting up all of the individual votes toward
    the national popular vote total could indeed see an effect.”

So after all this, what is the verdict of the stock market, according to Tom McClellan?

  • “So given all of these factors together, here is my best guess: I am projecting a 2 point margin of victory for Governor Romney in the nationwide popular vote
    What that means for the electoral college count, and thus the actual
    election, is a wholly different piece of analysis, about which other
    analysts are more capable than I am of handicapping the state by state

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