U.S. Markets open in 7 hrs 12 mins

Stock Market Drop Will Weaken Obama Re-Election Odds: Prechter

Breakout

Polls released yesterday showed President Obama has a narrowing lead nationally over Mitt Romney. The Wall Street Journal/NBC News Poll shows Obama out-polling his presumptive opponent in November's election at 47% to 44%, nationally, and having a much larger lead in swing states. The polls suggest a stabilizing of Obama's odds of re-election, which remain down some 10% since April, according to intrade.com.

Meanwhile the stock market has recovered from a May swoon, picking up nearly 6% from the closing lows in early June, driven in no small part by a greater than 10% gain in housing stocks, as measured by the SPDR S&P Homebuilders ETF (XHB). Despite the recovery, the S&P 500 is 6.5% off 2012 highs.

To Robert Prechter, founder of Elliott Wave International, the similarities between the polls and the market are no coincidence. As Prechter told Breakout in March, both markets and elections are decided by how people feel.

"Social mood is behind both of these," says Prechter. "It changes people's perception of how the president is doing, and it also changes traders' decisions about whether to buy or sell."

Prechter's work shows stock market performance tightly correlated with election results for more than 100 years.

Over the last one, two, and three years the stock market is higher, suggesting a win for Obama—but only if the election were held today. Prechter sees the market fading into the end of the year, with Obama's poll numbers going right along with it. Again, it's all about the mood.

"Odds are, the stock market is going to go lower between now and election day," says Prechter. He says people are getting less optimistic, but it remains the case that stocks are rallying on substance-free headlines like Greek elections, potential QE, and flat-lining economic data. It isn't just about stubborn optimism, it's also about the spread between optimism and reality as a measured by a stock market that refuses to cave.

For traders and President Obama it's a race against time as far as Prechter is concerned. Traders need to get themselves into cash before the resumption of the bear market, and Obama needs to keep the market dancing until November. Whether or not either of those things will happen depends entirely on America's mood.

Do you think a falling stock market will destroy President Obama's bid for re-election? Let us know your thoughts on our Facebook page.