Does the Stock Market Predict Presidential Elections?

Yes. In a study of all U.S. presidential re-election bids, researchers found “a positive, significant relationship between the incumbent’s vote margin and the prior net percentage change in the stock market.”

This relationship did not extend to the incumbent’s party when the incumbent did not run for re-election. The researchers found “no significant relationships between the incumbent’s vote margin and inflation or unemployment.” GDP was “rendered insignificant when combined with the stock market in multiple regression.”

The results are consistent with socionomic voting theory, which holds that social mood as reflected by the stock market is a more powerful regulator of re-election outcomes than traditional economic variables.

Source: Prechter, R. R., Jr., Goel, D., Parker, W. D., & Lampert, M. (2012). “Social Mood, Stock Market Performance and U.S. Presidential Elections: A Socionomic Perspective on Voting Results.” Socionomics Institute, Emory University School of Medicine, and University of Cambridge. Read the complete study on SSRN →

Study Overview

The researchers analyzed all U.S. presidential election bids in which an incumbent ran. From the paper’s abstract:

We analyze all U.S. presidential election bids. We find a positive, significant relationship between the incumbent’s vote margin and the prior net percentage change in the stock market. This relationship does not extend to the incumbent’s party when the incumbent does not run for re-election. We find no significant relationships between the incumbent’s vote margin and inflation or unemployment. GDP is a significant predictor of the incumbent’s popular vote margin in simple regression but is rendered insignificant when combined with the stock market in multiple regression.

— Prechter, Goel, Parker & Lampert, “Social Mood, Stock Market Performance and U.S. Presidential Elections” (2012), Abstract

The study examined the net percentage change in the stock market in the years preceding all American presidential re-election bids. As the authors explain: “For this study, ‘re-election’ is an election featuring an incumbent president, whether or not he initially obtained office via an election.”

What the Research Found

The primary finding is summarized by the authors:

We find a significant positive relationship between the stock market’s net percentage change during the three years prior to a re-election bid and the incumbent’s popular vote margin percentage. The net percentage change in the stock market for one-, two- and four-year periods preceding the election are each a weaker yet significant predictor of re-election outcomes.

— Prechter et al. (2012), p. 3

The authors were thorough in testing the robustness of their results:

Our results are robust to multiple variations in the elements of the testing procedure: measures of the stock market’s performance, measures of election outcomes, statistical methods used to gauge the relationship between the two, durations of data, and the presence of additional variables.

— Prechter et al. (2012), p. 3

The three-year window emerged as the strongest predictor. The authors explain their rationale for this measurement period: “We observe anecdotally that society tends to judge a president by the trends that occur during the bulk of the presidential term, barring much or all of the first year, for which the credit or blame is typically assigned to the predecessor.”

This three-year result held across both early and modern American history. The authors note: “This consistency is compatible with socionomic theory, which proposes that social mood’s influence on re-election results should be comparable despite any changes between the 19th and 20th centuries in terms of campaign strategies, communications technology, election rules, extent of public participation and so on.”

The summary finding from the Discussion section:

Generally, incumbents who preside over a net advance in the stock market tend to obtain a higher vote margin than incumbents who preside over a net decline in the stock market in the one, two, three and four years before the election. Of all the variations we test, the relationship between the three-year net percentage change in the DJIA and the incumbent’s popular vote margin is the strongest and achieves the highest level of significance.

— Prechter et al. (2012), Discussion, p. 30

Extreme Social Mood Swings Predict Landslide Elections

The paper’s analysis of landslide elections produced some of its most striking results. The theoretical basis:

Socionomic theory proposes that more extreme changes in social mood tend to motivate more extreme voting preferences for or against the leader.

— Prechter et al. (2012), p. 18

The data strongly confirmed this prediction. Using a contingency table analysis of all elections with large stock market moves and large electoral margins:

Fisher’s exact test indicates a high degree of association between the two variables (p = 0.009). Although only 15 elections meet the criteria for analysis, we can have confidence that the observed association is unlikely to have arisen due to chance in view of the exceptional predictive accuracy associated with these data (i.e., a 93% classification rate). Results as good or better would occur less frequently than 1 time in 100 if there is, in fact, no relationship between the variables in the theoretical population.

— Prechter et al. (2012), p. 19

The authors tested this finding across numerous variations in measurement thresholds and methodology. One notable result: “Using popular vote-margin thresholds of {+10%, –10%} and three-year stock market thresholds of {+0%, –0%} in the nominal DJIA, we obtain a predictive success rate of 92% (12 out of 13, p = 0.01).”

Their conclusion on landslides:

Large stock market advances during the final three years of incumbent candidates’ terms tend to be strongly associated with subsequent landslide victories, as opposed to landslide defeats, for incumbents in their re-election bids. Conversely, large stock market declines during the final three years of incumbent candidates’ terms tend to be strongly associated with subsequent landslide defeats, as opposed to landslide victories, for incumbents in their re-election bids.

— Prechter et al. (2012), Discussion, p. 30

The paper also observes several historical cases beyond the strict statistical boundaries: “King George III’s ousting as ruler of the American colonies in the late 1700s near the end of a 64-year bear market in English stocks, the regional rejection from ballots of many candidates in 1860 following a 24-year period of lower stock prices, and Richard Nixon’s resignation in 1974 during the biggest stock market decline in 36 years.”

Voters Blame Leaders, Not Parties

One of the study’s most telling findings is that the stock market’s predictive power applies only to the individual incumbent — not to the incumbent’s party:

The significant relationships between stock market changes and election results do not extend to the incumbent’s party during elections that feature no incumbent candidate. This difference suggests that voting behavior changes depending upon whether the election includes an incumbent.

— Prechter et al. (2012), Discussion, p. 31

When the incumbent’s party nominated a different candidate, the correlation between stock market performance and election outcomes effectively disappeared (β = 0.064, p = 0.821 for Democrats and Republicans; β = −0.048, p = 0.850 for all parties). The authors’ interpretation: “We are inclined to hypothesize that voters project their moods upon individual leaders, not parties.”

Why GDP, Inflation, and Unemployment Are Weaker Predictors

Political scientists have traditionally relied on what the authors call “the ‘big three’ popularity functions traditionally mentioned in the literature”: economic growth, inflation, and unemployment. The paper systematically tested each against the stock market.

Gross Domestic Product

The authors found that while GDP has some predictive power in isolation, it is inferior to the stock market:

Substituting the three-year percentage change in nominal GDP for the DJIA to predict the incumbent’s popular vote margin produces weaker relationships across the board, including a reduced linear regression beta weight (0.33 as opposed to 0.57 for the DJIA) and a smaller Spearman’s rank correlation (0.27 vs. 0.59). Similar results occur when substituting real GDP as the predictor (β = 0.47 vs 0.57, ρ = 0.46 vs. 0.59).

— Prechter et al. (2012), p. 28

Critically: “When predicting the dichotomous criterion of election win/loss, neither real GDP nor nominal GDP emerges as a significant predictor in logistic regression.”

The authors also addressed whether GDP might be the true driving force behind both stock market and election outcomes. Their data refute this: “When lognormal yearly changes in the DJIA are used to predict the subsequent year’s lognormal movement in GDP, we observe a significant beta weight of 0.25 (p < 0.0002), versus no relationship at all (β = -0.02, p = 0.81) when we use lognormal yearly changes in GDP to predict the subsequent year’s lognormal movement in the DJIA.” In other words, the stock market predicts GDP, but GDP does not predict the stock market.

Inflation and Unemployment

Using the three-year percentage change in the PPI rather than the DJIA to predict an incumbent’s popular vote margin results in a sizably worse beta weight (0.16 vs 0.57 for the DJIA) and Spearman’s rho (0.15 vs. 0.59), neither of which is statistically significant. The unemployment rate, with data available from 1940 to the present, fails to register as a significant predictor in the same simple regression analysis. It yields a beta weight of -0.11 and Spearman’s rho of -0.18.

— Prechter et al. (2012), p. 28

The bottom line: “Neither the PPI nor the unemployment rate is able to predict better than at chance levels with regard to overall election win/loss.”

Multiple Regression: The Stock Market Dominates

In a large number of analyses, the DJIA remains the only significant predictor of election outcomes when combined with nominal GDP, real GDP and/or the inflation rate. With popular vote margin as the criterion, none of eleven combinations of various independent variables registers as a significant predictor; the DJIA remains a significant predictor in all such combinations.— Prechter et al. (2012), p. 29

Predictor Variable	β (3-year, pop. vote margin)	Significant?
Stock Market (DJIA)	0.573	Yes (p = 0.001)
Real GDP	0.47	Weak; insignificant in multiple regression with DJIA
Nominal GDP	0.33	Weak; insignificant in multiple regression with DJIA
Inflation (PPI)	0.16	No
Unemployment	−0.11	No

The Socionomic Explanation: Social Mood as the Hidden Variable

The paper’s results are framed within socionomic theory, which offers a fundamentally different model of causation from the standard economic voting paradigm. The authors describe the theory:

Prechter (1999) posited that social mood — the aggregate, unconscious levels of optimism and pessimism in a society — emerges spontaneously in self-organizing human social systems, fluctuates according to an internally regulated growth process described by Elliott’s (1938) wave model, is impervious to economic and political stimuli, and drives collective human action and non-rational decision-making unconsciously in contexts of uncertainty.

— Prechter et al. (2012), p. 7

Social Mood
The aggregate, unconscious levels of optimism and pessimism in a society. According to socionomic theory, social mood emerges spontaneously in self-organizing human social systems, fluctuates according to an internally regulated growth process, is impervious to economic and political stimuli, and drives collective human action and non-rational decision-making unconsciously in contexts of uncertainty.

— Definition drawn from Prechter (1999) as cited in Prechter et al. (2012)

The theory’s specific application to elections:

Prechter (1989, 1999, 2003) hypothesized that when social mood has been trending towards optimism, voters will be more inclined to desire to keep the incumbent in office; and when social mood has been trending towards pessimism, voters will be more inclined to desire a change from the incumbent.

— Prechter et al. (2012), p. 8

The mechanism is unconscious attribution of mood to the leader:

Prechter (1999, 2003) proposed that the policies of the incumbent and his challenger are irrelevant to this dynamic. He surmised that voters unconsciously (and erroneously) credit incumbents for their positive moods and blame incumbents for their negative moods.

— Prechter et al. (2012), p. 8

Socionomic Voting Theory
The hypothesis that social mood, an endogenously regulated psychological variable reflected in stock indexes, unconsciously motivates voting behavior whenever a leader faces re-election. When social mood trends positive, voters re-elect the incumbent; when it trends negative, they reject the incumbent. The policies and actions of the incumbent and challenger are proposed to be irrelevant to this dynamic. Voters unconsciously credit incumbents for their positive moods and blame them for their negative moods.

— Synthesized from Prechter (1999, 2003) as cited in Prechter et al. (2012)

A key distinction from the economic voting literature concerns the direction of causality. Conventional models assume that political leaders influence the mood of voters through policy. Socionomic theory proposes the opposite:

Under socionomic theory, policy statements and actions by leaders are powerless to affect the mood of the voters; instead, the mood of the voters has a powerful effect on the policy statements and actions of leaders.

— Prechter et al. (2012), p. 8

Three supporting studies were cited. Kuklinski and Segura (1995) “reported that mood appeared unresponsive to politicians’ efforts to influence it.” Nofsinger and Kim (2003) “found a relationship between the trend of social mood and the subsequent actions of U.S. lawmakers,” reporting that “Congress tended to tighten investment restrictions after social mood had become more negative… and tended to loosen investment restrictions after social mood had become more positive.” Geer (2006) “reported that, rather than negative political ads making voters feel more pessimistic, voters’ pre-existing attitudes instead affected how candidates chose their advertising.”

The Stock Market as a Mood Indicator, Not a Cause

The authors are careful to distinguish between the stock market as an indicator and social mood as the underlying cause:

Social mood — a hidden, independent variable — simultaneously determines both stock market outcomes and incumbent presidential re-election outcomes. This formulation avoids the error, as we see it, of confusing the indicator with the cause.

— Prechter et al. (2012), p. 10

Why does the stock market work better as a mood indicator than economic data? The authors explain: “Investors…can buy or sell in the stock market almost immediately in response to social mood, so its effects appear there prior to appearing in macroeconomic indicators.” By contrast, macroeconomic results require extended time because of “the time requirements of meeting, planning, lending or borrowing, opening or closing facilities, hiring or firing, building or reducing inventory, and so on.”

Endogenous Social Causality
The principle that social mood originates from within human social systems rather than being caused by external events. Socionomic theory proposes that social mood “emerges spontaneously in self-organizing human social systems” and is “impervious to economic and political stimuli.” Economic and political trends are results of social mood, not causes. The stock market registers mood changes before they appear in macroeconomic indicators because investors can act immediately while business decisions require months to materialize.

— Drawn from Prechter (1999) as described in Prechter et al. (2012)

The paper made four specific predictions derived from socionomic theory, all of which the data supported:

Ruling Out the “Grateful Stockholder” Explanation

Could the results be explained simply by stockholders voting their pocketbook? The authors address this directly:

The grateful (or ungrateful) stockholder explanation seems untenable given that the data for GDP, PPI and unemployment fail to support egotropic hypotheses of “grateful economic participants,” “grateful savers” or “grateful employees.” This problem for such an explanation seems doubly serious given that economic participants, savers and employees have always outnumbered stockholders, usually substantially.

— Prechter et al. (2012), p. 32

The authors present a further empirical test. Stock ownership in the U.S. was “likely negligible across the national population prior to 1900,” ranged from 2.1% to 9.6% between 1900 and 1950, and reached 50.4% of households by 2005. If “grateful stockholders” were driving the relationship, it should be far stronger in the modern era when more people own stocks. But the data show the opposite pattern: “The association between election outcomes and stock market performance is stronger in the pre-1900 period than the post-1900 period, though both are significant.”

The authors conclude:

Voters in the aggregate are not responding to stock market changes, economic changes, inflation rates or the availability of jobs; nor are they voting rationally for social improvement. Rather, they are voting in accordance with trends in social mood. An increasingly positive social mood produces a rising stock market as well as votes for the incumbent, and an increasingly negative social mood produces a falling stock market as well as votes against the incumbent, thus producing the positive relationship we observe.

— Prechter et al. (2012), p. 33

Conclusion and Practical Implications

The paper’s conclusion:

Stock market performance relates significantly and positively to the outcome of U.S. presidents’ re-election bids. Hypotheses of economic voting fail to account for our findings. Our results, however, are consistent with Prechter’s socionomic theory, specifically that social mood, an internally regulated psychological variable reflected in stock indexes, is more powerful than economic variables in motivating voting behavior whenever a leader faces re-election.

— Prechter et al. (2012), Conclusion, p. 35

The authors also derived a practical suggestion: “Whenever one of a party’s potential candidates is an incumbent who has served during a period of major mood setback as indicated by a large net decline in the stock market — in real or nominal terms — that party may increase its chance of retaining control of the presidency if it chooses to nominate a candidate other than the incumbent.”

For future research, the authors proposed expanding the socionomic framework beyond U.S. presidential elections: “Future political studies might also examine the relationship of social mood to the timing of new dictatorships, the frequency of political apologies, and outbreaks of peace and war. Under a broader umbrella, we propose analyzing social mood as it relates to a wide variety of social activities, from instances of mass celebration or destructive riot to trends in fads, fashions and popular entertainment.”

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