SPX and 2012 Elections 3

By: Adam Hamilton | Fri, Oct 26, 2012
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After a long contentious slog, the hyper-critical 2012 elections are almost here. Americans will finally have the opportunity to choose our great nation's future course. Will we collectively vote for free-market prosperity or big-government dependency? One thing is certain, the fortunes of the US stock markets will play a major role in this all-important decision. Few things influence our national sentiment more.

While ideology governs how some cast their votes, for the great majority of Americans the deciding factor is how we are doing economically. Do we feel secure in our jobs? Are our businesses thriving? Can we maintain our lifestyles? Are our incomes sufficient to provide for our families and save for the future? If we feel good economically, we favor incumbents. Why change leadership that is producing good fruits?

Of course we intimately understand our own personal economies, whether we are blessed with surplus income or are struggling to make ends meet. But naturally we humans are always anxious about the future, wondering if times of plenty or scarcity are coming next. So we look to broader economic trends to try and game the unknown future. Our own little economies generally mirror America's national one.

But for the average American who isn't a student of the markets, it isn't easy trying to understand how our national economy is doing. There's an endless torrent of economic data released constantly, which is difficult to comprehend without context. All the individual data series such as our gross domestic product and unemployment rate have varying utilities. Digesting and integrating them is certainly no trivial task.

So we look for shortcuts, simple proxies that presumably reflect the health of our national economy. And the dominant one by far is the state of our stock markets. When our flagship stock indexes are rising, we all feel better and believe it signals America's economy is growing. And when they are sinking, we worry that our national economy isn't healthy and wonder how this weakness will affect our own families.

Traditionally the stock-market metric of choice used for this quick economic read was the venerable Dow Jones Industrial Average. Every day on virtually every news program in every medium, the Dow is always mentioned. This is especially true if it happens to achieve a notable up day or suffer a particularly large down day. An up Dow sparks optimism within us, while a down one spawns wearying anxiety.

We Americans vote our pocketbooks, make political decisions based on how our families are faring economically. And we take our cues on whether our future lot is likely improving or deteriorating based on how our stock markets are doing. So the state of the stock markets heavily influences how we cast our ballots. They are a quick proxy for the broader US economy which governs all our financial futures.

This relationship between stock-market fortunes and voting is well-established. This chart looks at one small aspect of it, how the stock markets affect presidential approval ratings. The elite polling house Gallup conducts extensive daily polls on whether Americans approve or disapprove of our president's job. Gallup then publishes this fascinating data as a 3-day moving average to smooth out some volatility.

We superimposed Obama's daily job approval and disapproval numbers for his entire term over the flagship S&P 500 stock index (SPX) in this chart. The SPX is far superior to the Dow so it has long been the preferred stock-market metric among professionals. It is much broader and market-capitalization weighted unlike the Dow's antiquated price weighting, making it the definitive stock-market measuring rod.

After taking office following that brutal once-in-a-century stock panic, Obama enjoyed one heck of a honeymoon. The panic was horrible for everyone, destroying vast swaths of wealth and confidence in our economic futures. So regardless of whether you loved or loathed Obama in November 2008, once he was elected we all had high hopes his leadership would bolster a rapid economic recovery in America.

Because of that honeymoon effect, the 2009 presidential job approval and disapproval ratings aren't relevant. But ever since then, Americans' views on the job Obama is doing have been closely tied to the fortunes of our stock markets. The green approval-percentage line has a high positive correlation with the blue SPX one, while the red disapproval-percentage line shows an opposing strong negative correlation.

When our stock markets power higher in mighty uplegs, Obama's approval rating surges while his disapproval rating sags. Near major interim highs in stocks, the fruits of major uplegs, Obama's approval rating is high and his disapproval rating is low. Why? We Americans feel more optimistic and hopeful for our own personal economic futures when the SPX is thriving. Its fortunes heavily color our sentiment.

But after uplegs come corrections, steep selloffs in the stock markets to rebalance away the excessive greed seen at major toppings. And look what happened to Obama's approval and disapproval ratings after the two major corrections seen in mid-2010 and mid-2011. Both times his approval rating plunged while his disapproval rating soared. Weak stock markets leave us pessimistic, and upset with our political leaders.

During those SPX corrections, Obama's approval ratings were the lowest of his entire term while his disapproval ratings were the highest. Even after smaller pullbacks, like earlier this year, Obama's disapproval rating climbed while his approval rating sunk. Gallup's awesome polling data superimposed over the stock markets really drives home just how all-important the stock markets are in influencing voting.

This is true historically too. Earlier this year the famed newsletter firm InvesTech Research did some fascinating research into the stock markets' performance and every presidential election since 1900. Specifically it examined how they fared in the final two months leading into these elections. Since these elections are always held in early November, this means the September and October timeframe.

And the results were astounding. InvesTech found that how the stock markets fared in the final two months before elections correctly forecast 9 out of 10 of them! And this relationship was simple. If the stock markets were up in September and October, the incumbent party's president won. And if they were down over that same near-election span, the incumbent party's president lost. InvesTech broke it down further.

Over the last 28 presidential-election years, the stock markets rallied in September and October 16 times. The incumbent party won 15 of those elections! And during the other 12 times where the stock markets slumped in September and October, the incumbent party lost 10. The overall success rate of this simple indicator is 25 out of 28 elections, or an amazing 89%. The stock markets are a critical voting influencer!

And that begs the obvious question for these upcoming 2012 elections, how are the stock markets faring during these past couple months? History suggests Obama has a 94% chance of winning reelection if they are up, and an 83% chance of losing if they are down. Incredibly as of the middle of this week, the SPX was essentially dead flat in September and October! But it has been a wild ride to get here.

Since the stock panic ended, the stock markets have been enjoying a powerful cyclical bull within a secular bear. Back in early April of this year, the SPX reached a major interim high and stalled out. For 5 long months, it couldn't make any headway at all. This left this flagship index just under 1407 at the end of August, 0.9% below its early-April peak. Then something either very fortuitous or nefarious happened.

In early September, both the European Central Bank and the Federal Reserve announced open-ended new quantitative-easing campaigns. Traders had been eagerly anticipating both of these for a long time, because the new money created by easing ultimately sloshes into the stock markets and drives up prices. So first on the ECB's sovereign-bond buying pledge and shortly after on the Fed's QE3 campaign, stocks surged.

Thus by mid-September, the SPX had blasted 4.2% higher since August's close. It was also propelled to a major new cyclical-bull high, its best levels in nearly 57 months. We Americans are the most optimistic near major stock-market highs, so Obama's approval rating soared to some of its best post-honeymoon levels in late September while disapproval ratings plunged. You can see this in the chart above.

This Fed-spawned rally was hugely advantageous to Obama so near the election, so naturally the Fed's timing is very controversial. Normally the Fed doesn't act leading into elections because it doesn't want to be seen as political, so it was odd to see the Fed launch QE3 in mid-September after it had already waited 15 months since QE2 ended. Why not wait a little longer until after the elections to birth QE3?

It was even more suspect since Republican lawmakers have heavily criticized the Fed for the vast deluge of inflationary money that its quantitative easing has unleashed. Was the Fed throwing in its lot with Obama, fearing Republicans would scale back its power? I don't know, but thanks to stock-market action it might not matter. Just one day after QE3 was launched, the SPX peaked and started grinding sideways.

And gradually this high consolidation started decaying into a slide, especially in this past week as more and more third-quarter corporate earnings missed expectations and disappointed. So by the middle of this week, the SPX was right back to where it started leading into this critical September and October period. There is no doubt this past week's stock-market slide will soon be reflected in the polling data.

With just several trading days left in October, and only six full ones until Americans head to the polls, the coming stock-market action is super-important. If the SPX bounces higher, Americans are going to feel a little better about their future economic prospects and more likely to keep the incumbent. But if the SPX keeps sliding lower, anxiety and pessimism are going to take root which will favor the challenger.

We all figured it would be a close race in our heavily-divided country, and the stock markets are certainly exacerbating this with their schizophrenic September-October ride so far. But as I discussed in an essay last week, it really looks like the stock markets are rolling over after the recent years' stock bull topped. If this is the case, the odds definitely favor additional weakness in the week ahead which will hurt Obama.

And as a small businessman responsible for feeding the families working with me in my company, that is fine with me. Obama has been an utter disaster for America, a plague. He campaigned in 2008 on an openly Marxist and Socialist platform. He relentlessly demonized the core American values of hard work and success, advocating toxic class warfare and stealing from the productive to bribe the lazy for votes.

These horrible philosophies destroy people, especially the poor. One of God's Ten Commandments is "You shall not steal." Theft is the basis for Obama's entire party, seizing ever-rising percentages of income from the people who earned it to redistribute to those who didn't. But these welfare handouts ruin the recipients, eliminating their desire to work and succeed while their useful skills slowly atrophy.

I'm sure it feels good at the time to sit around and draw a government check, but it enslaves people in poverty. Working is hard, as an entrepreneur I know that as well as anyone. But it is the only path to success. Imagine if your child didn't want to do his math homework because it was hard. You could do it for him in a tenth the time, and he'd be thrilled. But he would never learn the skills necessary for life.

Obama's welfare culture is like that. Instead of encouraging people to work, to forge their own skills necessary to succeed, it fosters dependence on government. And cynically the Democrats love that, because government checks buy them future votes. I personally know people who lost jobs, accepted Obama's extended unemployment payments, and now aren't hirable since their skills became outdated.

Rather than celebrating hard-working Americans who have succeeded and pulled countless people out of poverty, Obama attacks us. So many times in the past four years he has declared that successful Americans aren't paying our "fair share", or should pay "a little bit more". This is a brazen lie, as the IRS taxation data perpetually proves. Obama's poisonous class-warfare rhetoric is nothing but pure demagoguery.

The latest IRS data is for 2009. That year the top 1% earned 16.9% of the total income in America, yet this group paid a staggering 36.7% of all income taxes. We are paying far more than our fair share! The top 5% earned 31.7% of the income, yet paid a whopping 58.7% of this country's income tax. Meanwhile the bottom 50% earned 13.5% of America's total income, yet merely paid 2.3% of its total income tax.

Now like pretty much every American who has worked their fingers to the bone to achieve success, I have no desire to see my poorer countrymen taxed significantly more. I would like to see everyone pay some income taxes so they all have skin in the game. But as a high-income taxpayer, it makes my blood boil every time Obama lies and claims successful Americans aren't paying our fair share. That filthy liar!

Because of Obama's endless toxic rhetoric, American businessmen have not been hiring. We don't know what our taxes are going to be, how much Obamacare is going to cost us, or how hard Obama's myriads of new government regulations are going to make our lives. So while we, including me at my little company, want to expand, it seems pointless as long as someone hostile to job creators like Obama remains in power.

Thus Obama's legacy is horrendous. He has presided over 43 months, out of 44 in his presidency, of unemployment over 8%! The true unemployment rate, including people who have given up looking or are stuck working multiple low-paying jobs well below their skillset, has sometimes doubled the headline one! Obama's policies have not put people back to work, no president has ever seen so few jobs created.

Jobs have disappeared under Obama while average American incomes have fallen. Meanwhile welfare has surged, including food stamps. It always amazes me that the bastions of Obama support including the young, blacks, and women have been hit the hardest by his failed policies. Unemployment among these groups is far higher than the headline average, yet they continue to blindly wave the Obama flag as their lives crumble.

This man has been the most divisive president I've ever seen in my entire life, refusing to work with the opposing party as all presidents must. His one signature achievement was ramming through Obamacare even though the strong majority of Americans opposed it. That vote in Congress was very close and party-line, Obama wouldn't compromise. Last year he reneged on a debt-ceiling agreement with Congress, crushing the stock markets.

One of the president's most-important jobs is balancing the budget. Yet Obama's reckless big-government spending has led to deficits averaging around $1.3 trillion dollars each during every year of his term! This has almost doubled our national debt in just four years, saddling our children with huge tax burdens for decades to come. If Obama was the CEO of anything, he would have long since been fired.

We gave Obama a chance, and he has been a disaster. He has paralyzed our economy by demonizing hard-working businessmen. He has pissed away countless billions on failed programs like his massive stimulus bill and bankrupt green-energy investments. His total lack of leadership and endless attacks on everyone who disagrees with him have created a venomous environment that has fractured America.

Since I don't want my children to grow up in such an anti-American environment, I already cast my vote for Romney. America needs real leadership, a man with experience successfully running companies and a state and balancing the budget. The Socialist course Obama has been trying to bully America onto has to change. I shudder to think about what another four years under Obama would do to our great nation.

At Zeal we can't wait for this election to happen, and there is no doubt the fortunes of the stock markets will affect voting. And the outcome of the election will in turn certainly affect the stock markets, but that is a topic for our subscribers. We are currently loading up on cheap gold and silver stocks, as no matter what happens to the SPX the precious metals are poised to start surging again as their seasonal uplegs resume.

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The bottom line is the fortunes of the stock markets heavily influence election outcomes. We Americans tend to feel more optimistic about our own economic futures when the stock markets are strong, so we let incumbents keep their jobs. But when stock markets are weak, we fear it reflects a poor economy as a whole and worry about our own future prospects. So we kick out incumbents to give challengers a shot.

And despite the Fed's inflation boosting the stock markets, by any other measure Obama's record has been an economic disaster. Our economy is barely growing, there are too few jobs, and the poor people Obama is supposedly trying to help are being slaughtered financially. America desperately needs a new course, Obama's policies failed. So I pray you join me and cast your votes for Romney and the Republicans in Congress!

 


 

Adam Hamilton

Author: Adam Hamilton

Adam Hamilton, CPA
Zeal LLC.com

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Mr. Hamilton, a private investor and contrarian analyst, publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis of markets, geopolitics, economics, finance, and investing delivered from an explicitly pro-free market and laissez faire perspective. Please visit www.ZealLLC.com for more information, www.zealllc.com/samples.htm for a free sample, and www.zealllc.com/subscribe.htm to subscribe.

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