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

Election and the stock market
Election and the stock market

This 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.

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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.