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The REAL October Surprise May Be Hiding in Plain Sight

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The countdown is on and it's still anybody's game. The stakes couldn't be higher in the final days leading up to the election. Polls are tighter than ever and speculation is rising about potential impact from Hurricane Sandy and the October jobs report due out this Friday morning. Are either of these the October Surprise that'll swing enough momentum in President Obama's or Mitt Romney's direction? Any jobs numbers far outside of consensus estimates — 120,000 new jobs created and 7.9% unemployment rate — may very well influence some last minute undecided votes. (See Related: With One Week Until Election, Jobs Report May Sway Votes)

But if the market is any guide, it could prove to be the surprise that everyone is searching for. A rising stock market is typically good for an incumbent president's odds of re-election. Sam Stovall, chief equity strategist at S&P Capital IQ, has been tracking the historical correlation between market price action and presidential election outcomes, as explained in a research note this past summer. Specifically, Stovall focused on the S&P 500's performance from July 31 through October 31 — the three-month performance ahead of Election Day. (See Related: Stocks Up- Obama Wins. Stocks Down- It's Romney)

"The original report would basically be pointing to an Obama re-election because whenever the market is up from August through October, the incumbent has been re-elected 80% of the time," Stovall explained in a phone interview yesterday.

So far, the S&P 500 is up 2% from July 31 to October 26, a positive for the President. But the mood has been shifting throughout October, and it began with the first presidential debate on October 3. Since then, not only have the National polls narrowed dramatically, but some have reversed and put challenger Mitt Romney ahead of President Obama — a move directly in sync with the stock market. While August through September posted a 5% gain, the S&P 500 has fallen 2% in October. That decline could signal a deeper change that may play out in Mitt Romney's favor.

"Looking at October alone, if the market is up for the month, the incumbent is reelected 79% of time," says Stovall. "But if it's down, the challenger wins 78% of the time; a down October has pointed to the challenger winning seven of nine times."

The magnitude of Hurricane Sandy unexpectedly shut down the market this Monday and Tuesday, leaving us with one final day of trading left this month. When the market closes out October in negative territory, maybe speculators will realize the real October surprise has been right in front us of, hiding in plain sight.

Do you think the market trend favors a Mitt Romney victory? Let us know your thoughts on our Facebook page.

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