Tuesday, November 6, 2012

Stock Market & Presidential Elections 2012

Our lives and our decisions are governed by our moods. We live as per our mood (socialize if we are happy, stay introvert when depressed), we eat according to our mood (spend when we think we have money and are happy, or sleep with a just Ramen noodles when we are tired or are not affluent), and spend what we feel like. In short, our actions are governed by our mood swings. In the same respect, we vote as per our mood i.e. if we feel good, we vote for the incumbent. On the other hand, if we feel bad, we register revolt through our vote. In other words, voting is the best representation of the collective social mood of a society.

Another way to analyze the social mood is through the stock market, because Stock Market is the barometer of the broader social mood. When market rises, optimism increases and when it declines, pessimism saturates. This cyclic behavior is so common that it gave way to the contrarian trading strategies. This is because society’s collective optimism peaks near the top, while collective fear peaks at the bottom. Although there are many ways of measuring the sentiment, this article will address the relationship of people’s vote and the broader social mood.

At this point it is clear that both Stock Market and Voting exhibit social mood. The only caveat is the delay between the social mood exhibitions through the Stock Market VS Voting. If one wanted to assign a timeline to social mood exhibition, Stock Market would be the first responder, while geo-political events will be the last responder. This is because the social mood pushes the society to take actions in accordance with the broader social mood. These actions range from Voting out the incumbent leader to starting a War with another country. The interesting to keep note of is the fact that this social mood change is typically displayed through the stock market price pattern.

Now, if we look at the current situation from the stock market perspective (shown below), it is very clear that the market has been rising under President Obama’s administration. In fact the market has more than doubled under Obama since March 2009.
DJIA: 6500 ==> 13500
Gold: 900 ==> 1800
Oil: 35 ==> 90

This stellar stock market and commodities market performance along with the latest consumer confidence reading (consumer confidence is touching 4-year highs) and the low VIX numbers, clearly suggest that the social mood is very optimistic. Although we know that these 100% gains are a factor of prior market collapse, the short-term memory of the populous will allow these gains to work in the favor of the president. 

In past, when mood has been this optimistic, we have rarely seen an incumbent losing the elections. In other words, no matter how bad President did during his tenure, he has done enough good to keep the asset prices afloat, avoid a second recession and bring back optimism among the masses about the future of the country. Therefore, from a stock market and social mood perspective, President Obama is the favorite to win today’s presidential elections.

However, if the President loses today, it would mean that elevated stock market prices are not the sole representation of the Social Mood. And that people do take into account their personal situations when dealing with things like elections.

Next Post: Implication of Election results on the Stock Market (An Elliott Wave perspective)


  1. Does it matter that retail investors have almost completely abandoned the stock markets and they are being kept afloat by $2 trillion of Quantitative Easing?
    I don't think anyone doubts these markets would be at collapse levels without QE, now 85 billion a month. To extrapolate that into "social mood" ... well maybe something else is going on.

  2. I agree with your hypothesis but to be fair still most of the country has its retirement 401Ks linked to the stock market in one way or another. So when market rises, whether genuinely or artificially, it does impact the way people see their retirement savings as they increase their net worth. When their net worth increases, people do feel more optimistic and put in more money etc.

    Secondly, if the market collapses over the next few years, it would mean that QE or no QE, markets are supposed to do what is in the charts (our interpretation can be wrong). And external influences do not impact the market. This still remains to be seen!!

    Finally, markets went up in anticipation of what FED could do. since now fed is all in, there is not a lot of anticipation. This is another interesting point to keep in mind as we move forward.

    M. Naqvi

  3. Ok. The S&P broke the support level of 1404, touched the 1380's and closed in the 1390's. Naqvi, do you see the markets going lower to the 1380's or 1360's? I think we are in a confirmed medium downtrend. Do you think IPM meant to turn to a decline from here on? The 50 day and the 100 day moving averages to the downside have been broken. Maybe the next IPM in this month would be the bottom? with Market Matrix on the fear mode, Obama, broken supports, and lower than the QE3 levels, aren't we going down from here?



    PS: can you remove the capcha thing. Is annoying : )

  4. So I would say this that yes we are heading down. The only question remains that whether we will see a temporary bottom early next week before continuing further down. This will be discussed further when IPM model update will be sent over the weekend to subs.

    8/4 Test has been completed and we are in a downtrend. Downtrends do not reverse in one day. therefore, we have further downside left.

    As for the Captcha thing, I myself have found it very annoying. But I have not figured a way to get rid of it.

    P.S. I will be posting a very interesting analysis on the impact of presidential election on the market and what it means for us going forward. So look for it sometime tomorrow.

  5. "Finally, markets went up in anticipation of what FED could do. since now fed is all in, there is not a lot of anticipation."

    I don't believe that is true. QE makes its way directly into the stock market via primary dealers. The newest batch of 45 billion a month doesn't get to the primary dealers until Nov. 14th.


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