When it comes to elections, it really is the economy, stupid

ByABC News
January 29, 2012, 6:11 PM

NEW YORK -- No endorsement on the campaign trail is more powerful for a president seeking re-election than a rising stock market, a declining unemployment rate and a feeling on Main Street that things are getting better.

History shows that President Obama's chances of defeating either of the top Republican challengers, Mitt Romney and Newt Gingrich, might have less to do with what the president says he will do to fix the U.S. economy and more to do with how the nation's business locomotive is performing in the run-up to Election Day.

No post-World War II president has been re-elected when the unemployment rate is rising in the 14 months leading up to the election, data from Strategas Research Partners show. Incumbents who lost when the jobless rate was moving higher include George H.W. Bush in 1992 and Jimmy Carter in 1980. Currently, the job market is firming. Unemployment fell to 8.5% in December, down from 9% in October.

"People vote their pocketbooks," says Brian Belski, chief investment strategist at Oppenheimer. "The election is about the economy. If people are feeling better they figure, 'Why switch it up?' "

On the flip side, if stocks swoon, the economy tanks and unemployment lines grow, the door opens for voters to consider a political alternative to Obama on Nov. 6. "Voters will say, 'If Obama can't fix it, who is the next guy to fix it?' " Belski says.

Right now economic momentum is picking up. The latest readings on initial jobless claims and orders for pricey goods with long life spans, such as refrigerators and ovens, have come in better than expected. The data have also been more upbeat on home builder's confidence, manufacturing, auto sales and construction spending. The better news has helped the stock market, which is up 4.7% in January after a flat 2011.

A debate is raging as to which candidate has the best plan to trim the country's ballooning deficit, get the economy to grow, put Americans back to work and revive the housing market.

But before placing investment bets based on election predictions, Wall Street handicappers are looking through the prism of history to see what factors might determine who wins. History says the trajectory of the economy during an election year plays a huge role.

What the numbers indicate

Right now, the presidency appears up for grabs. Some analysts say the race for the White House may come down to jobs. Dan Clifton, an investment strategist who analyzes Washington politics for Strategas, is using a simple prediction strategy tied directly to the percentage of Americans out of work.

"If the unemployment rate climbs above 9%, Obama will lose," Clifton says. "If it drops to 8% the probability of victory goes up, because the president can say that the economy is moving in the right direction. But if the jobless rate stays where it is at 8.5%, it's probably a tossup."

The early polls also point to a close race. Obama has a 54% chance of being re-elected, according to Intrade.com, an online prediction market. Taking into account margin of error, the election outcome is basically 50-50.