How the Last Word of the Election Goes to the Market

Job numbers and the market’s reaction will set the tone for November 6.

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With little more than two weeks, the last debate is make or break for Barack Obama and Mitt Romney.

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The first Friday in November looms as the biggest day remaining before the presidential election.

With jobs and the economy the most important factors in deciding votes, the monthly employment report due out November 2 could eclipse the presidential debates and campaign appearances to come. Its result will key the final points the candidates make as campaigning winds to a close.

The numbers alone are important, but the reaction of Wall Street also matters. It marks a very big "public vote," just two trading days before the voting booths open. Despite all the bashing of banks and traders, history shows that a healthy Wall Street helps a sitting President enormously.

Weaker jobs data seen as likely. Economists say they expect October's employment report to yield unimpressive data after a strong report in September from the Bureau of Labor Statistics lifted stocks and sent anti-Obama conspiracy theorists, led by former General Electric chief Jack Welch, into overdrive saying the administration must have "cooked the books." 

Economists scoff at the idea. Still, many say September's figures may have raised expectations too high for the upcoming report, and could even lead to a reversal in September's gains. Moody's Analytics has predicted the jobless rate will push back above 8 percent the months to come.

The recent decline in the unemployment rate to 7.8 percent was seen as a coup for Obama, who came to office in the midst of a severe recession that drove unemployment to double digits for the first time since the early 1980s. But few economists see a recovery to prerecession levels (as low as 3.8 percent in 2000) anytime soon.

"Whatever you think about the election or crazy conspiracy theories, you have to look at the September data as an outlier and expect that things will return to the normal, slower growth and higher unemployment rate we've been seeing," says Dan Veru, chief investment officer at Palisade Capital Management in Fort Lee, N.J.

[Read: Are We Headed Over the Fiscal Cliff?]

If that happens, the November report could be a late-inning setback for Obama's re-election hopes. Still, a mild market reaction would surely soften the blow. 

So far, Wall Street's recovery has helped Obama in a big way. The S&P 500 has risen an impressive 70 percent since the day he took office. That's the third-largest percentage return of any four-year presidential term over the last century. (The S&P stood at 850 on Jan. 20, 2009, when he took office, and hit 1457 as of Thursday's close.)

Why jobs matter so much. Nothing seems to matter to investors quite as much as jobs—and that's based on more than just television sound bites and debate points in this year's presidential campaign.

The Employment Situation, as the report is officially known, is the most significant monthly economic indicator in part because it is the first major data point investors see. It's also a bread-and-butter concern. Obviously, nothing hits home harder than a job loss, and its impact ripples through retail sales, home purchases, and overall confidence.

Also critical for markets: Jobs have been the main focus of the Federal Reserve in setting monetary policy, which in turn holds sway over interest rates. The Fed's other job, fighting inflation, has not been a factor in recent years of near-zero increases. 

The link between jobs data and stock prices is decades old—and its impact can be swift. JPMorgan Asset Management's Michael Cembalist in a recent report cited 13 times when the market has risen by 2 percent or more on the day the employment data was released. A Fed study in 2008 concluded that the jobs data was "the most heavily watched" economic figure.

[Read: Fearful Investors Still Shouldn't Hide.]

Adding to the drama behind jobs data. The data will be picked apart even more this time. Mitt Romney "has been telling people to watch the 'participation rate' [as an indicator of] the 'real rate of unemployment, which is much higher," says Veru. The Romney argument is that the unemployment figure is artificially low because so many people have dropped out of the employment-seeking total. To be sure, if all of the dropouts figured into the data, the unemployment rate would be higher, economists say.