"It Ain't Over Till It's Over": Empirical Observations On Who The Next Occupant Of The White House May Be And Why
It is appropriate that as a post-mortem to tonight's GOP primary, which according to initial reports has Romney as winning both Michigan and Arizona, we have ConvergEx' Nick Colas providing an extensive summary of the factors in favor and against both the presidential incumbent, and the challenger, and in doing so handicap the possibility of election victory for either Obama or the Republican candidate, whoever he may end up being. As Colas says, 'it ain't over till it's over' - "As the battle for the 2012 Presidential election begins to pick up speed, we read a flood of reports that President Obama is a lock for reelection. And just as many that he is destined to be a one-termer. Those who believe that the winner of the 2012 election will be Republican claim that the keys to Obama’s downfall will be unemployment, skyrocketing oil prices, and increased federal spending. However, according to historical data and some political science theory, it looks like Obama has a pretty good chance of staying in the White House. Incumbents hold a substantial advantage over opponents in elections: only 4 out of the 14 elections involving incumbents since the 20th century have gone to the challenger. Various studies showing historical stock market correlation to presidential election results favor an Obama victory in 2012. Conversely, rising oil prices and unemployment rates seemingly have no correlation to either re-election or incumbent ousting. Finally, and most importantly, swing states are more likely to vote for an incumbent candidate than not – as it stands, 10/12 of the identified battleground states for 2012 are going blue. The GOP isn’t out of the race yet, but it’s up against some strong historical opposition."
And while we would agree that all else equal Obama likely is a shoo-in, never before will there have been a full blown debt ceiling crisis in a repeat of August 2011 in the weeks and months leading into the election - that factor alone, in our humble opinion, could end up being the swing variable that pulls the otherwise ironclad victory away from Obama's clutch, and explains why the GOP caved so quickly on the payroll tax extension which will add $100 billion in debt, and force a debt ceiling breach ahead of November, as was first predicted on Zero Hedge. That, of course, and runaway oil: should crude continue its relentless surge, which it will if QE3 occurs, or an invasion or Iran becomes reality, Obama can kiss another 4 years goodbye.
More from Colas:
What a difference a year DOESN’T make.
Exactly one year ago, a Gallup poll among registered US voters asked “If Barack Obama runs for re-election in 2012, are you more likely to vote for Obama or for the Republican Party’s candidate for President?” Less than half of those polled (45%) said they would re-elect the Democrat, but an equal 45% said they were more likely to vote for a yet-unnamed GOP candidate. In a Bloomberg poll conducted 4 months later in late June of 2011, only 30% of respondents said they are certain to vote for the current president while 36% said they definitely won’t. Now, in February of 2012, it’s still not obvious with way the country is going to swing in November: there’s no overwhelmingly clear GOP candidate, and Obama’s approval rating is still at a below-average 45% according to Gallop (49% average).
There are gaggles of studies and surveys flying around with a wide array of arguments and data showing that President Obama is unlikely to be re-elected due to a variety of economic and social factors. A brief summary of a few of these points here:
- Since Obama took office in January of 2009, the unemployment rate surged from 7.4% to 10% in October of the same year. In the 2 ½ years since the peak, the rate has only come down to 8.3% (as of January); many argue that the decline has not been nearly fast enough. Further, some of this decline is due to reduced labor force participation, rather than incremental employment trends.
- Similarly, under the Obama administration less than half of the jobs lost during the recession have been recovered. Employment peaked in January of 2008 at 138,023,000, and troughed in February of 2010 at 129,244,000 for a total of 8,779,000 jobs lost. Since that low, only 3,894,000 have been regained – a 44% recovery rate.
- Federal spending has ballooned during Obama’s tenure in office, with the deficit more than 145% what it was when Obama took office on January 20, 2009 ($15.4 trillion vs. $10.6 trillion), and debt as a % of GDP has passed 100% for the first time in history – and continues to rise. The American people have become increasingly frustrated with the country’s inability to manage the deficit and debt, as reflected in Congress’s approval rating in August of last year during the debt limit debate. Some of the blame for this situation also falls on the President’s shoulders.
- Crude oil prices have climbed more than 180% since their lows in December of 2008, while retail gasoline prices have risen almost 90%. US consumers are being hit heavily by these increases, and some no doubt blame the Obama administration for the price hikes. And even if they don’t, they certainly know they are less well-off then when oil prices were lower.
- For many on the Far Right and some on the left, Obama’s corporate bailouts alone should preclude him from re-election. From the Tea Party to Occupy Wall Street, a wide variety of voters have become fed up with the current government’s involvement in financial markets, and see the ousting of Obama as one of the solutions to the problem. Yes, we know these started in the last days of the Bush Administration, so in truth neither party’s hands are entirely clean on this point.
But while these factors are undoubtedly going to push some 2008 Obama supporters over to the right in 2012 or keep them from voting this time around, historical trends point to an Obama victory in the next election. Here is a sampling of economic and capital market indicators that have a proven level of predictive power:
- Incumbent advantage. Political science theory and historical trends show that a Presidential incumbent has a significant advantage over any challenger. In the 14 elections of the 20th and 21st centuries in which an incumbent was running for re-election, only 5 were won by the challenger – and that’s if you include Ford’s loss to Jimmy Carter, as technically Ford wasn’t elected. Excluding this anomaly, challengers have had only a 29% chance of being elected over the incumbent in the past 100 years or so. Obama also has no clear challenger, as the GOP has yet to definitively choose a candidate for the election. Lastly, he has not faced a primary challenge, in the way Jimmy Carter did, for example, with Ted Kennedy in 1980.
- Stock market performance. According to an analysis conducted by the Socioeconomics Institute in Gainesville, GA, there is a positive, significant relationship between incumbent re-election and net percentage change in the stock market (the DJIA, specifically). The results of the study show that the incumbent has an 82% chance (or better) of being re-elected when the stock market has gained 20% or more in the three years preceding the election, and that the gain typically leads to a landslide victory for the incumbent – defined as an electoral vote margin of 40% or greater. Furthermore, data that we’ve seen widely quoted but originally from the Stock Trader’s Almanac suggests an up market in the three months preceding an election indicates an incumbent victory, while a down market favors the challenger. Similarly, an up market in the first half of the election year points to incumbent re-election and vice-versa. Finally, a third study by political science professors David Leblang and Bumba Mukherjee argues that decreased market volatility signals a Democratic victory, while increased volatility favors Republicans. Should these results hold true in 2012, Obama seems to be a shoe-in: the Dow has gained 30.4% since November of 2009, while the S&P 500 has risen 32.4% and the Nasdaq has added 38.6%. The first two months of 2012 have been decent for the broad U.S. indices and volatility is at very low levels.
- Unemployment. While much of the discourse surrounding the 2012 election focuses on stubbornly high unemployment, historically this indicator has no visible impact on an incumbent’s re-election chances. Since the BLS began keeping records of the unemployment rate in 1948, three of the six presidential elections went to incumbents who had actually increased the unemployment rate during their terms: Eisenhower saw the rate increase 59% during his first four years in office, Nixon saw a 56% increase during his first term, and under GW Bush (2000-2004) the rate rose 26%. Equally counterintuitive is the fact that President Carter actually got the rate down between 1976 and 1980, and yet he was not re-elected. Under Obama, the unemployment rate has “Only” risen 14%, substantially less than increases seen in the first terms of many other re-elected incumbents. Judging by historical precedent, such a moderate increase does not automatically oust him from office in the next election.
- Oil prices. Oil and gasoline prices tell a similar story: despite the concerns over rising oil prices and their impact on Obama’s chances in November, there is no apparent correlation between either crude oil or retail gasoline prices and incumbent re-election. For example, it makes sense that Reagan was re-elected after prices for both oil and gas dropped more than 30% from their peaks during his first term. Beyond these two elections, however (which were also heavily influenced by Iranian politics), the intuitive relationship between crude/gasoline prices and re-election is negated. GHW Bush lost to Clinton in 1992, despite the fact that prices for both crude and gas had dropped significantly from their peaks by the time he was up for re-election. Crude oil climbed more than 66% from its trough in Clinton’s first term, and yet he was re-elected in 1996. Under GW Bush, gas prices surged 69.1% and crude oil soared 132% from their lows in December of 2001, and yet he was still re-elected. As for Obama, gas has risen 87.4% and crude has soared 183.2% since their troughs in December of 2008. While these numbers are certainly higher than other candidates that have been up for re-election, if the pattern of the past few elections continues, it’s not likely to have a significant impact on Obama’s chances.
- Swing states. Swing states are the battlefields of any and every presidential election. Unfortunately for the GOP, voting history among the twelve key swing states for 2012 (CO, FL, IA, MI, NV, NH, NM, NC, OH, PA, VA, WI) point to an Obama victory in November. In the 14 incumbent elections since the 20th century, these states have voted for the incumbent 60% of the time: the majority only voted against the incumbent in 1912, 1932, 1980, and 1992. These were also the only elections in which the elected incumbent was voted out (excluding Carter). Additionally, and possibly more importantly, swing states only voted unanimously against the incumbent in 1912 and 1980; in 1932, only two voted for the incumbent, and in 1996 only 3 voted in favor of GHW Bush’s re-election. Looking back to the stock market performance study, each of these elections was lost by a landslide. It’s a safe assumption that these swing states are partially to thank for this phenomenon. This history tells us that at a minimum, the GOP would have to win the votes of at least ¾ of the swing states (or 9 states) in order to guarantee victory to the Republican candidate. Given the power of incumbency, this is clearly a tall order.
Historically, then, the GOP faces a real uphill battle for the 2012 Presidency. That does not mean, however, that the task is impossible. While Republicans lack the incumbent advantage and may not be able to take much comfort from the current bullish tone of the stock market, their playbook still has some useful lessons.
- Reagan. Ronald Reagan’s first term in office was similar Obama’s current tenure in many ways: staggeringly high unemployment, heightened geopolitical risk before entering office (think Iran hostages, Iraq/Osama bin Laden), and obvious domestic economic impasses. Unlike Obama, however, Reagan (the Republican) was able to bring unemployment down from 10.8% to 7.2% in only two years. Finally, and most importantly, when Reagan took office in January of 1981, the economic situation was palpably worse: unemployment, the CPI, interest rates, and the poverty rate were both significantly higher than those seen in 2009, and the stock market and real median family income had fallen substantially. And yet by the end of his first term, following the implementation of “Reaganomics”, each of these variables had been brought back to healthy, sustainable levels. Bottom line – the GOP might still have a “Brand” with voters when it comes to economic issues.
- Iran. The renewed geopolitical risk out of the Middle East may also work to Republicans’ advantage. The threat from Iran echoes a situation not long past: Iraq in 2003. Though perhaps later developments in the country were not popular among American voters, during the mid-2000s the majority appeared to support the President’s decision to invade: George Bush’s first-term approval rating was 62.2%. It is also worth noting that Reagan had immediate success in Iran – another Republican President. The argument here could be that a firm hand is needed to deal with the rising political threat, and Obama is incapable of filling that role.
- Obama’s failure in the swing states. Though it may seem obvious that the GOP should rehash Obama’s shortcomings as often as possible to win over his prior supporters, this effort should be more heavily concentrated in and directed towards the swing states. Beth has been working through the specific topics important in these states, and while incumbency certainly helps President Obama, it doesn’t preordain success.
In truth, the election could go either way. Historical precedent favors Obama, but the GOP has a variety of tools at its disposal, should it choose to use them. Though they cannot directly change the direction of the stock market or oil prices, emphasizing Republican success in similar circumstances and winning over swing states will be imperative to the GOP candidate’s election chances. In other words, it ain’t over till it’s over…