“…social mood is a strong regulator of which leaders are selected and how they are perceived. More specifically, when the trend in social mood is positive, investors tend to bid stock prices higher and voters tend to retain incumbent leaders; and when the trend of social mood is negative, investors tend to bid stock prices lower and voters tend to oust incumbent leaders. In other words, our theory is that C (social mood) causes A [stock market rise] and B [election of an incumbent].” —Robert Prechter, “Why the Stock Market is a Good Predictor of Elections“
Robert Prechter, a “social scientist,” and his colleagues have examined correlations between stock market performance and the elections of incumbents or challengers. They find that the three year record before the election was an excellent predictor of the election result, better than 1, 2 or 4 year records or other financial indicators.
Now we all know that correlation is not causation. If you find in a mixed-sex class that hair length shows a strong anti-correlation with height, you’ll not argue that growing taller makes you lose hair. Rather, you’ll know that height is correlated with sex (not “gender,” which refers to a language classification) and that girls tend to have longer hair than boys (truer in the past than now).
Prechter and his colleagues propose the hidden variable for stock market performance and electability to be “social mood.” As with Judge Potter Stewart’s remark about obscenity/pornography, I can’t define “social mood,” but I know it when I see it. Possibly one can get a quantitative measure of “social mood” by the “optimism” quality measured in polls, or the poll question “are you better off now than in…?” If the latter, 56% of respondees say they’re better off now.
The sharp dip in the S&P 500 index, March/April (featured image) corresponded to the start of the covid-19 panic. My retirement IRA tanked then, but has recovered somewhat to date. Since that time the market has fluctuated up and down, but with an overall rise, as the featured image shows.
Is the overall three year rise a good predictor for a Trump victory, or does the down dip in the spring and the fluctuations make his victory doubtful? I don’t know. What’s your guess, dear reader?
NOTE
Here’s an interesting digression. Sornette and Anders have posited that the stock market is, like some physical cooperative phenomena—magnetism, phase transitions—subject to a critical point where the state changes discontinuously (e.g water freezes, the market crashes). They use an empirically based math model to predict (retrospectively) the 1929 and 1987 stock market crashes. Would their model have predicted the 2007 and 2020 crashes? That is to say, is it verified not by retrodiction but by prediction? Hmmm…
I would think the recent results of the “are you better off today” and “who do you think will win the election” questions from Gallup are more likely to be predictors, based on history, than this “let’s find the hidden rubric” study, but it is very interesting nonetheless. To put on my Captain Obvious hat, either history will be predictive in this election, or it won’t be. My confirmation bias may be showing, but I think it will be predictive, and Trump will be re-elected despite a very broad attempt to steal the election by the left. He has a plan to thwart them and the left is not going to like it, but I don’t believe they can stop it.