Robert R. Prechter, Jr., best known for his work with the Elliott Wave Principle as a tool for forecasting stock market and economic trends, also wrote a book called The Wave Principle of Human Social Behavior and the New Science of Socionomics, published in 1999.
This book is must reading for anyone hoping to understand the ways that social mood impacts the markets, and in defining the science of socionomics Prechter laid some important groundwork that has brought more refinement and accuracy to the work of predicting future trends.
The big forecasting question on everybody’s mind right now is, of course, the outcome of the U.S. presidential election in November, and right on time Bob Prechter came out last Thursday with an updated version of a research report that he authored earlier this year with Deepak Goel, Wayne D. Parker, and Matthew Lampert, published by the Socionomics Institute.
Titled “Social Mood, Stock Market Performance and U.S. Presidential Elections”, this report makes for fascinating reading. Here’s the 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. Hypotheses of economic voting fail to account for the findings. The results are consistent with socionomic voting theory, which includes the hypotheses that (1) social mood as reflected by the stock market is a more powerful regulator of re-election outcomes than economic variables such as GDP, inflation and unemployment and (2) voters unconsciously credit or blame the leader for their mood.”
In other words, the better the stock market does during the years of a U.S. president’s first term of office, the more likely he is to be reelected if he runs for a second term. For example, here’s a chart of the Dow Industrials, showing the market trend for the last six years, with the time that Barack Obama took office in January 2009 noted on the chart:
We’ll have to wait until November to see just how accurate this forecasting tool proves to be. In the meantime, however, you can download a complete copy of the report on “Social Mood, Stock Market Performance and U.S. Presidential Elections” by clicking here.