How stock market affects presidential elections

Conventional wisdom tells us that the state of the economy is positively correlated with presidential election outcomes.

When the economy is strong, voters tend to elect the incumbent, but when economic conditions are weak, voters tend to elect the challenger.

In 1999, stock market analyst and best-selling author of “Elliott Wave Principle,” Robert Prechter, argued that social mood, not economic conditions, is a better predictor of presidential elections.

According to this theory, presidential candidates do not affect the mood of the voters, no matter what they say about what they have done in the past or promise to do in the future.

Instead, it is the voters’ mood that affects the actions of the candidates.

Prechter proposed that we can anticipate the direction of politics by using the stock market as an indicator of social mood, because investors can immediately express their sentiment if they are positive or negative about the future by buying or selling stocks.

Prechter hypothesized that when social mood is trending toward optimism, as reflected by a rising stock market, voters will be more inclined to keep the incumbent in office.

But when social mood is trending toward pessimism, as indicated by a falling stock market, voters will unconsciously blame the incumbent for their negative mood and seek a change in leadership.

In retrospect

If we look back in history and apply this theory, we will find that prior to the accession of Cory Aquino to presidency, the local stock exchange index has been declining for years from late 1970s era to 1986.

The fall in the stock market, which reflected negative social mood, culminated in the ouster of President Ferdinand Marcos.

We remember that this was a very difficult period in history, as President Aquino’s government was constantly struggling for political stability amid persistent coup attempts.

But social mood was surprisingly positive all throughout her term, which saw the local stock index rising from a low of 130 in 1986 to as high as 1,450 in 1992.

This positive social mood obviously favored the incumbent’s candidate, then Gen. Fidel Ramos, to win the presidency.

The strong bull market continued under President Ramos’ term until the Philippine Stock Exchange index (PSEi) began to decline in massive correction from its peak at 3,447 in 1997.

The negative social mood at that time led to the defeat of Ramos’ handpicked successor, Joe de Venecia at the hands of then Vice President Joseph Estrada, who won by landslide victory in 1998.

Under Estrada’s term, the stock market recovered strongly but lasted only for one year when social mood turned negative, resulting in another “People Power” revolt that ascended Vice President Gloria Macapagal Arroyo.

During her term, President Arroyo’s government was marred by a lot of controversies from election fraud to corruption scandals, not to mention the coup attempts, but social mood remained increasingly positive with PSEi rising to record highs.

It was only during the last three years of Arroyo that social mood began to turn negative, which led to the defeat of her candidate, Gibo Teodoro, to Benigno “Noynoy” Aquino III in 2010.

Uncharted territory

Under President Aquino, social mood was positive, which led the PSEi to new highs. It only began to turn negative in early 2015, which led to the election of challenger, Rodrigo Duterte.

Now, if we look at how the stock market has performed since the outbreak of coronavirus pandemic, the PSE index has been rising from a low of 4,020 in 2020 to as high as 7,552 this year.

The rise in the stock market shows social mood was positive during these past two years, despite all the losses in the economy and mounting unemployment.

This positive social mood, which favors the incumbent President Duterte, could also mean high election chances of presidential candidate, Ferdinand Marcos Jr, who is largely identified with the incumbent’s supporters.

On the other hand, if we look at the long-term trend of the stock market, we will find that the PSEi has been declining for more than four years now, from its peak at 9,078 in 2018 to current level of 7,124.

Applying the same theory, we can say that a declining stock market indicates an increasingly negative social mood, which could motivate voting preferences for the strongest challenger, presidential candidate Leni Robredo.

So, who will social mood favor on election day? Find out where the market will go. INQ

Henry Ong is a registered financial planner of RFP Philippines. Stock data and tools are provided by First Metro Securities. To learn more about investment planning, attend the 95th batch of RFP program this May 2022. To register, email [email protected] or text at 0917-6248110.