Poor market in September bodes ill for incumbent party

Has the stock market already voted by absentee ballot in this November's presidential race?

It may very well be in the process of doing just that.
And a big clue as to how it is voting is provided by Thursday's dismal stock market, in which the Dow Jones Industrial Average fell by 345 points. For the still-young month of September, the Dow is now down 3.1%.

This points to an increased likelihood that the Democrats will reclaim the presidency in November's election.
The reason I can even attempt to draw these conclusions from the stock market's recent behavior is an analysis conducted by Ned Davis Research, an institutional research firm based in Venice, Fla.
Specifically, the firm constructed two market averages out of how the Dow has performed in past presidential-election years (back to 1900, in fact). The first of these two benchmarks tracked the market's average performance during years since then in which the incumbent political party eventually won the White House, while the other reflected average returns when the incumbent party lost.
Upon comparing these two benchmarks, as Ned Davis noted earlier this week, "There does not seem to be a lot of difference in election years between those years where the incumbent party wins or loses, except in the month of September where the divergence is striking."

How big a divergence?
During Septembers of years in which the incumbent party goes on to win the White House, the Dow has produced an average gain of 0.32%. During Septembers in which the incumbent party lost, in contrast, the Dow has produced an average loss of 0.71%.

That difference, which totals just over one percentage point, may not appear to be that big. But on an annualized basis it works out to around 13%.
Good statistician that he is, Davis realizes that correlation is not the same as causation. One needs to couple the raw statistics with a plausible theory as to why the stock market would perform differently when the incumbent party wins the White House than when it loses. "Perhaps it is the uncertainty over change," Davis speculates, "or perhaps the stock market predicts or reflects the election results."
Another qualification that Davis emphasizes: "The sample sizes are relatively small." So we can't be as confident in drawing any conclusions as we would if there were lots more data points.

Regardless, however, the stock market's losses this week can't be good news for John McCain's campaign.