The American Elections and the Financial Markets

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Here’s one thing that is not an October surprise for these United States midterm elections: voters are still polarized, just as they were back in 2000 (Bush vs. Gore) and 2004 (Bush vs. Kerry). Split down the middle into Republicans and Democrats with 2004 electionvery few swing voters left in the middle. But let’s not blame this polarization on political slogans (“stay the course” vs. “cut and run”) or October surprises. Instead, let’s take a look at the financial markets to see the kinds of rifts that have developed, mirroring the rifts in the body politic.

Generally speaking, the stock market goes up and the economy is strong when Americans are happy. Their positive social mood creates harmony even though political, social, and religious views vary widely. Today, though, even with auspicious financial news, people are upset about the war in Iraq, they’re mad about illegal immigration, they can’t stand what’s going on in Congress, and more than 60% don’t like the way President Bush is handling his job.

One reflection of this negative mood might be the Dow itself. How can that be if it’s been going up, which should reflect a positive mood, you ask? Here’s how: Although the nominal Dow (the one priced in terms of the U.S. dollar) has pushed to a new all-time high above 12,000, the Dow priced in terms of ounces of gold is actually down significantly from its top in the year 2000. The same is true if you view the Dow priced in terms of commodities. What that means is that an inflated dollar is carrying the Dow higher than it would be if it were measured in real, non-inflated terms.

So polarized voters are examples of a split social mood, which can also account for the rift between what the stock market seems to be and what it really is. Voters are split between those who believe in the good news (portfolios doing well) and those who are uneasy about the markets and the economy even in the face of good news (portfolios doing poorly).

Usually, when social mood is positive, the stock market is up, the economy looks good, and incumbents win. That would bode well for the Republican party come November 7. However, an incumbent president’s popularity usually predicts his party’s victory or defeat. Positive social mood makes a president popular while negative social mood makes a president unpopular. Since the President’s popularity rating is less than 40%, that would seem to bode poorly for the Republicans.

So which is it? Actually, the markets and presidential popularity polls mirror another time in our nation’s history when people were polarized over a war and huge changes in society. The year was 1968, when Lyndon B. Johnson’s vice president, Hubert Humphrey, ran for the presidency against the Republican nominee, Richard M. Nixon. It was the year that students protested on college campuses against the Vietnam War; the year that Robert Kennedy was assassinated after winning the California Democratic primary; and the year that police beat up anti-war protestors at the Democratic convention in Chicago.

As the Elliott Wave Financial Forecast pointed out in the June 2006 issue: “Today’s interplay of markets against a backdrop of diverging social phenomena-from plunging presidential approval ratings to attacks against the most successful corporations to an increasingly unpopular war-duplicates the collective social experience of 1968.”

The markets had been rallying since 1966, but LBJ was hugely unpopular because of the Vietnam War. He stepped up the draft, because he refused to use reserves from the National Guard to augment the standing armed forces. Eventually, more than 500,000 U.S. soldiers were fighting in Vietnam. (Compare that with the approximately 140,000 U.S. soldiers in the volunteer Army and National Guardsmen in Iraq and Afghanistan now.)

As the Dow rose about 35% – going from a low of 735 in 1966 to a high near 1,000 two years later in 1968 – Johnson’s popularity fell from about 50% to below 35% and then went back up to around 45%. In comparison, as the Dow rose about 66% – going from a low near 7,200 in 2002 to the recent all-time high above 12,000 – Bush’s popularity fell from near 70% to around 37%. In each case, although the Dow rallied in the late 1960s and in the mid 2000s, these presidents grew more unpopular as people focused instead on their protracted wars, troop deaths and profligate spending.

The outcome in 1968: Nixon beat Humphrey with a popular vote that was nearly evenly split with 43.4% for Nixon; 42.7% for Humphrey, and 13.5% to George Wallace of the American Independent Party. That result begs the question: Who is going to be our third-party candidate in 2008?

Looking at the markets and the social mood behind the poll numbers, analysts at Elliott Wave International say that the “big difference between Bush’s readings vs. the stock market and those of Johnson is that this time the discrepancy has been building for roughly twice as long” – two years vs. four years. They interpret this divergence between a high-flying Dow and low-tumbling popularity numbers as the precursor to a turn in the stock market. In fact, since the Bush build-up has been longer, they expect that the turn in the markets will be bigger than during 1968-69 when the Dow dropped about 20% from its high.

This polarized atmosphere also suggests that the social unrest that the United States has been experiencing should grow larger. More people in the streets protesting over immigration reforms. More oil company executives testifying before Congress. More innocent kids getting shot in schools. More hateful political campaign ads questioning the morals of the other party’s candidate. More negative and confrontational behavior that we haven’t even thought of yet.

Regards,

Susan Walker
for The Daily Reckoning

Editor’s Note: Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. A graduate of Stanford University, she has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter at the Federal Reserve Bank of Atlanta.

For more on Elliott Wave International, see here Elliott Wave.

Susan Walker
Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. A graduate of Stanford University, she has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter at the Federal Reserve Bank of Atlanta.
Susan Walker

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