President Obama runs with the bulls

The Dow Jones Industrial Average on Tuesday closed above 13,000 points for the first time since May of 2008, bolstering President Obama’s argument that the economy is improving.

The stock market surge comes weeks after the nation’s unemployment rate dipped to 8.3 percent, its lowest level in three years.

Despite falling home sales and a disappointing report on durable goods, the market closed at 13,005.12 on the back of another reporting highlighting improved consumer confidence. The day before Obama’s inauguration, the Dow closed at 8,281 points.

In a speech on Tuesday, Obama said, “The economy is getting stronger. The recovery is speeding up.”

Political strategists in the White House and Congress have been focused on the jobless rate, wagering that if it falls, Obama’s reelection chances will rise. No president has been elected with an unemployment rate above 8 percent since Franklin Roosevelt.

But new research suggests the Obama campaign might be better off focusing on the Dow.

A report from the Socionomics Institute in Georgia found a strong correlation between rising stocks and an incumbent president’s electoral fortunes.

The report concludes that when people see the value of their investments rise, they are in a better mood and are more likely to reward a sitting president with their votes. In contrast, when voters see their 401(k) plans losing value, they are much more likely to take it out on the sitting president.

Voters “unconsciously credit or blame the leader” of the country for their mood, the report states, and the stock market is a more “powerful regulator” of reelection outcomes than other variables such as the unemployment rate and gross domestic product.

Robert Prechter, Deepak Goel, Wayne D. Parket and Matthew Lampert, the authors of the report, find the most powerful relationship to be between the stock market’s net percentage change during the three years prior to a reelection bid and the incumbent’s popular vote margin percentage.

This is good news for Obama, given where the market closed on Tuesday.

The Dow Jones Industrial stood at 9,712.73 on Oct. 30, 2009, about three years before Election Day 2012.

Even if the market rises no higher between now and Election Day 2012, a market at 13,000 would translate into a roughly 34 percent gain over three years, an annual double-digit return.

If the market improves, Obama will be in even better shape.

For example, a bull market over the next seven months that moves the Dow to 14,000 points would represent a 44 percent gain over three years. A Dow at 13,500 would represent a 39 percent change over that amount of time.

The stock market is a tricky issue for Obama, however. The president has repeatedly attacked Wall Street throughout his presidency, and touting the Dow could backfire with many people on Main Street struggling.

Regardless, if the market falls, it will be good news for Obama’s GOP opponent. For example, if the Dow drops to 12,000, it would fall to a 23.5 percent gain over three years.

An average 8 percent-per-year return isn’t bad, but given the low point where the market stood three years ago, it might not be enough for Obama.

While the authors of the Socionomics report say it’s best to look at the three years prior to Election Day when gauging the market impact, others say it’s smart to look at more recent market action.

InvestTech Research, an investment firm in Montana, argues that if markets rise in the two months prior to Election Day, the incumbent will win.

The incumbent party has won 15 of the 16 elections in which the stock market climbed in the three months before Election Day, the research firm found. In the 12 election years when the stock market suffered losses, the incumbent party lost 10 of 12 elections.

There are some anomalies over the past few years that should give pause to market-based predictions for the 2012 presidential race.

Eric Vermulm, a senior portfolio manager for InvestTech, said markets typically underperform during a president’s first two years in office before rebounding strongly in the third year.

This is probably because markets detest uncertainty, and the big policy changes generally enacted by a president who has just won office introduce great uncertainty.

Obama’s tenure, however, hasn’t fit that pattern.

During his first two years in office, the market did well, in part because it was rebounding from the low point of the financial crisis.

In Obama’s third year, the market trod water and basically finished the year where it started.

The fourth year of a presidential term is typically a good year, but markets are off to a great start in 2012.

Still, economic uncertainties mean the White House shouldn’t start popping open any champagne bottles just yet.

Stocks climbed impressively during the first four months of 2011 before more than giving up their gains during the debt crises in both the United States and Europe. 

Investors and campaign strategists over the next eight months should probably proceed with caution.