Anytime that presidential popularity is the topic, you're bound to hear the word "charisma" thrown around. Remember how charismatic President John F. Kennedy and Ronald Reagan were thought to be? But what truly makes a president popular has less to do with his personality and much more to do with the state of the stock market. This question-and-answer with Bob Prechter excerpted from Prechter's Perspective gives the background as to why that is so. More recently, Bob spoke about the change from the bearish markets in February and March to the recent bear-market rally in his April 2009 Elliott Wave Theorist. Right now, we are in the middle of what Elliott wave analysis calls a wave 2 correction of a larger downtrend. Here's what Bob has to say about the difference in social mood between an upturn and a downturn in the markets.
"Wave 2, regardless of its extent, should regenerate substantial feelings of optimism. At its peak, the President’s popularity will be higher, the government will be taking credit for successfully bailing out the economy, the Fed will appear to have saved the banking system, and investors will be convinced that the bear market is behind us. Be prepared for this environment; it will be hard for most investors to resist…."
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Q: You say that social mood as reflected by the financial markets dictates whether or not political leaders are popular. Have you used this insight of the market to anticipate outcomes for national leaders?
Bob Prechter: Sure, because the popularity of a country's leader is motivated by the same unconscious impulses that drive the stock market and the economy. A president's actual performance is irrelevant. Granted, this is a hard message for most people to accept. But the Elliott Wave Theorist has used this relationship to forecast the fates of three U.S. presidents when the conventional wisdom was predicting the opposite.
· In January 1987, when Ronald Reagan's presidency was being rocked by the Iran-Contra affair, the Theorist said that Reagan would exit as one of our "most loved presidents."
· In April 1991, when George Bush enjoyed a 91% approval rating, the highest for any president, the Theorist predicted that he would lose the next election. That latter forecast was as long a shot as there is in politics.
· Then, as Bill Clinton's term began, we predicted that he would be pushed from office. It didn't happen, but he was impeached.
Q: What about the next guy?
Bob Prechter: [Editor's note: Remember, this interview took place before both President Obama and George W. Bush were in office.] The next president, and maybe even one or two after that, should watch out. They will have to ride out the slide into a deflationary crash and depression. The party of the person who is in office during the worst of it will be devastated politically.
Q: You apparently don't take sides.
Bob Prechter: No, my analysis in non-partisan.
Q: Can you apply the rules of Elliott to political analysis?
Bob Prechter: The guideline of alternation seems to apply. It has a specific technical meaning in wave formations but also pertains to social trends. For example, you might recall that Richard Nixon won re-election in a landslide in late 1972 at the peak of a bull market. Despite everyone's high hopes, he was hounded as a law-breaker and ultimately driven from office in August 1974 by the social mood reflected by the bear market. Bill Clinton took office with the market at a new all-time high amidst strong popularity, a Time "Man of the Year" cover, and high hopes for his performance. Like Nixon, he was hounded as a lawbreaker as the market corrected in 1994. Instead of Watergate, it was Whitewater. But one was a Republican and the other a Democrat. The specifics alternate. The essence repeats.
Q: Back in 1989, when two-party politics appeared assured forever, you predicted a third party and a shake-up of the traditional parties.
Bob Prechter: Yes, because what normally happens in the type of period that is approaching is a polarization of opinion in all kinds of areas. It's not just that the left takes over or the right takes over. During bull markets such as in the 1950s and the 1980s, most people are centrists. In bear markets, you see extreme polarization. You get leftists and rightists on one axis, and authoritarians and champions of individual liberty on the other, battling it out for power.
Q: Is there necessarily a direct relationship? Do the social dynamics that make investors buy or sell stocks also influence the electorate to choose one presidential candidate over the other?
Bob Prechter: Yes. The single best predictor of presidential popularity is the trend of the Dow Jones Industrial Average. The precision with which presidential popularity has tracked the Dow and its rate of change is remarkable. It usually also indicates whether an incumbent will win re-election.
Q: The market simply reflects the social mood, but once the trend is in place, can its performance reinforce what's going on in the political arena?
Bob Prechter: I used to think so, but I don't anymore. Mood is autonomous. The market is just a meter for it. In other words, it's easy to say that losing money in stocks makes people despair, but I think despair makes the market go down, so they lose money. It has to be this way, or stock trends would never end. So the trend toward happiness or despair causes voting patterns to change. It would happen even if there were no stock market.
Q: Bear market politics seem more interesting.
Bob Prechter: Oh, yeah! That's when people tend to vote for more radical candidates. When the next general decline in world stock markets takes place, the popularity of all incumbents will suffer. If the markets fall as far as cycles suggest, most incumbents will not win re-election. But don't confuse interesting politics with good fun. It's usually scary.