As more Americans have come to own stocks over the past 20 years, the stock market itself has become a leading indicator of presidential elections. One rule of thumb in this investor polling experiment is that a flat or down market in the 10 months preceding an election can spell defeat for the incumbent. In 1992, the broad-based S&P 500 was essentially flat, and the incumbent George H.W. Bush was defeated. In 2000, the index declined, and the proxy incumbent Al Gore lost in a cliffhanger. However, in both 1988 and 1996, the S&P rose more than 10 percent, signaling victory for respective incumbents Papa Bush and Bill Clinton.
Where are we today? Stocks, like everything else, are signaling a close call. Year-to-date, the S&P is higher by 1.5 percent, an underwhelming performance as far as Bush is concerned. However, since mid-August the S&P is up 6.2 percent, and in just recent days the whole stock market appears to be snapping out of its "bubble of fear" funk, to use economist Don Luskin's apt phrase. It's still possible that stocks are calling it for Bush.
Luskin and others have pointed out that uncertainties surrounding this election, such as the possibility of a highly litigious voter recount, have created a risk-averse fear among investors. The theory goes that this has induced investors to buy safe-haven gold or gilt-edged Treasury bonds rather than more economy-revitalizing stocks.
If the outcome of the election is unknown, the threat of terrorism at home and in Iraq could be much greater. This prospect has driven up oil prices. Even the announcement of Justice William Rehnquist's throat-cancer operation has clouded a potential Supreme Court decision. Subtract Rehnquist from the 5-to-4 verdict in 2000 and you are left with a 4-4 tie. And if we can't get it done here, how are the Iraqis supposed to do it over there?
Despite all this, investors still prefer George Bush over John Kerry by a margin ranging up to 15 percentage points, according to numerous polls. Undoubtedly they favor Bush's tax-cut policy over Kerry's proposed tax hikes. After all, Bush's tax cuts have propelled a net 50 percent increase in broad stock market averages since October 2002 (using the Wilshire 5000 index), even despite this year's market sluggishness.