Affecting: A strong stock rally could hurt President Obama.

Stock market does affect election — but not in the way you might think

How will equities vote in the presidential election?

That's a question Barry C. Knapp, U.S. equity portfolio strategist, Barclays Capital Inc., New York, addresses in a recent research report “U.S. Portfolio Strategy: Election 2012: "It's the economy stupid'.”

Mr. Knapp comes to what he calls a counterintuitive conclusion: The better the equity market performs, the worse the chances for President Barack Obama's re-election.

The “economic environment has not improved, consumer confidence measures have weakened and the president's approval ratings has followed expectations lower,” Mr. Knapp wrote in the report. “While the race remains too close to call, we believe the direction of the polls will be a major determinant of stock prices this fall.”

Mr. Knapp noted in the report “perhaps counterintuitively, the surprisingly strong 25.7% (S&P 500 price return from Aug. 1, 2011 to July 21, 2012) increase in the S&P 500 also points toward an unsuccessful re-election campaign. The average annualized (S&P 500) return just prior to the election for unsuccessful campaigns was 15.4%, while the average for successful campaigns was 10.4%. In 1980, the return was 24.3%. (The returns are only for the 12 months from Nov. 1 the year before the election until Oct. 31 the year of the election.) In other words, elections breed optimism, but change is even better from an equity market perspective.”

This article originally appeared in the October 1, 2012 print issue as, "Stock market does affect election — but not in the way you might think".