If you want to know whether President Obama will win reelection this year, then watch the stock market, says Standard & Poor (S&P) analyst Sam Stovall. Stovall is citing an “election-prognostication technique” tracked since 1948 in which the performance of the S&P 500 Index between July 31 and October 31 in presidential election years appears to forecast the election results. If the index rises, then 89 percent of the time the incumbent or the incumbent’s party wins reelection. In the event of a decline, they lose 86 percent of the time. Given that strategists are predicting that the stock index will rally 6.9 percent in 2012, this gauge would indicate that the president has a 52 percent chance of keeping his job[1]. According to Stovall, using the S&P to predict election outcomes works 88 percent of the time (It failed in the 1968 election when Richard Nixon was elected. That election also featured a strong third-party candidate in addition to the traditional democrat and republican and followed a several years of unrest in the wake of the assignations of Martin Luther King, Jr. and Robert F. Kennedy and violent confrontations between police and anti-war protestors protesting the Vietnam War)[2].

It should be noted that like 1968, 2012 is not, in many ways, a normal election year thanks to a serious national recession, the housing crisis and skyrocketing national debt. However, if 2012 were to follow normal patterns, Stovall says, the S&P would decline in January and February, post “fairly healthy advances” before the summer conventions, then slump, then “pick up steam after the election….[when] uncertainty had disappeared.” The critical component of this predictor relies largely on how “anguished” investors are over primary results and the final outcome of the upcoming election.

Do you think that Stovall’s gauge will hold true for 2012?

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[1] http://www.bloomberg.com/news/2012-01-06/watch-stock-market-for-obama-s-chance-of-re-election-s-p-s-stovall-says.html

[2] http://www.businessinsider.com/stovall-stocks-president-election-year-2012-1