Monday, April 23, 2012

Prechter Paper: "Social Mood, Stock Market Performance and U.S. Presidential Elections: A Socionomic Perspective on Voting Results"

Their paper, "Social Mood, Stock Market Performance and U.S. Presidential Elections: A Socionomic Perspective on Voting Results", just came out.

"We analyze all U.S. presidential re-election bids and find a positive, significant relationship between the incumbent’s vote margin and the prior net percentage change in the stock market. This relationship does not extend to the incumbent’s party when the incumbent does not run for re-election. We find no significant relationships between the incumbent’s vote margin and inflation or unemployment. GDP is a significant predictor of incumbents’ popular vote margin in simple regression but is rendered insignificant when combined with the stock market in multiple regression. Egotropic and sociotropic voting hypotheses fail to account for the findings. The results are consistent with socionomic voting theory, which includes the hypotheses that (1) social mood as reflected by the stock market is a more powerful regulator of re-election outcomes than economic variables such as GDP, inflation and unemployment and (2) voters unconsciously credit or blame the leader for their mood."
Their methods were pretty thorough. Evidence in support of social mood theory.

I write about Prechter fairly often and my review of his most famous book, Conquer the Crash, led to a theoretical breakthrough for me about investor genotypes in an investing ecosystem. Lots of Prechter's ideas stand on their own whether or not Elliot Wave Theory is true.

[I think that EWT is probably trivially true, or, as David Aronson writes in Evidence-Based Technical Analysis, its ability to "fit any segment of market history down to its most minute fluctuations" is because of its "loosely defined rules and the ability to postulate a large number of nested waves of varying magnitude."]

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