Obama's Second Term Is in Peril as Stocks Sink

Mitt Romney, Newt Gingrich and Ron Paul may be happy, at least in one respect, that the stock market has fallen this year.

That's because if the S&P 500 Index doesn't surge more than 10% by the end of next week, it might not rise at all in 2012, according to the record books. And that would make it difficult for President Barack Obama to be re-elected.

The benchmark index is down 1.1% in 2011, even after a second day of gains Wednesday. What's befuddling is that equities haven't declined in the third year of a president's term since World War II.

Sam Stovall, chief equity strategist at Standard & Poor's, says the third-year rally is anticipated on the belief that the president will do all he can to remain in office -- most frequently, pushing through stimulative economic legislation to entice voters.

As Stovall puts it: "Since investors are no better than hyperactive first-graders playing musical chairs, they won't wait until year four to see if the stimulus has worked. They buy into equities in the third year in anticipation of the benefits to profits and share prices in the fourth year."

According to Stovall's research, there were six years that the index increased less than 10% in the third year of a presidential term and, in most of those instances, the market dropped in the following year.

High unemployment, a debt downgrade, the failure to pass a deficit-cutting agreement and, most recently, the payroll tax cut debacle haven't given voters much to be confident about during the past year. The lame-duck Congress hasn't helped either.

In only two of the six years that the S&P 500 failed to increase at least 10% in the third year of a term, the incumbent president was re-elected. Of note, one of those incumbents was the highly popular Franklin D. Roosevelt in the race for his third term (1940). While Obama's approval rating has improved recently to 49%, it's close to the lower end of his approval rating range.

The election we are currently facing is most similar to t! he 1948 election when Harry Truman was running for office and was widely expected to lose. He was the incumbent president with a low approval rating, the stock market growth was anemic and it was a tough economic environment. Truman ended up winning the election, but the market declined almost 1% in the election year.

With nothing particularly compelling to look forward to in 2012, investors should brace for a decline in the S&P 500, and voters will need to determine if Obama is worthy of a second term.

-- New York.

Readers Also Like:

Best of 2011: Occupy Wall Street

Top 10 Videos: The Best of 2011

>To order reprints of this article, click here: Reprints