The stock market is a strong election day predictor3 min read . Updated: 08 Sep 2020, 10:16 AM IST
Since 1928, the incumbent party has won nearly 90% of presidential elections during an S&P 500 upswing
The stock market’s performance won’t definitively determine who wins the White House, especially in a year as unpredictable as 2020. History, however, shows the incumbent has a clear advantage when the market rallies in the months preceding Election Day.
Going back to 1928, incumbent presidents, or candidates from the controlling party, have won nearly 90% of elections when the S&P 500 is positive in the previous three months, according to brokerage firm BTIG.
“That is about as close to unequivocal as you are ever going to get," said BTIG analyst Julian Emanuel, who researched the history.
August kicked off the period with big gains. The S&P 500 rose 7% last month, its best August since 1986, while capping the strongest five-month run since 1938. That sounds like a bullish sign for a sitting president, especially one who enjoys tweeting about the stock market’s rallies.
But the big market selloff Thursday and modest decline Friday highlight how distant last month’s performance might seem to investors if the coming months end up being as volatile as many expect.
September is historically the stock market’s weakest month, with the S&P 500 down 54% of the time over the past 93 years, according to Dow Jones Market Data. Its average return is negative 0.96%. The index, however, tends to fare better during presidential election years than in the other three years of the cycle, falling 0.3% on average.
The rally already began to falter last week, with the S&P 500 falling 4.3% over the last two sessions. The losses trimmed the year’s gains to 6.1% and the rebound since March to 53%. Many investors saw it as a reaction to a market that was running hot. This year’s biggest winners, including Apple Inc., Microsoft Corp. and Amazon.com Inc., suffered the steepest losses.
Some investors are bracing for more volatility ahead, particularly in the period surrounding the election. Many predict the race to be tight, or even contested, and fear the result won’t be known for days, or possibly weeks, after Election Day. That scenario would likely put pressure on stocks.
The market faces other unknowns as well. If the coronavirus pandemic were to surge anew, the fledgling economic recovery might be in jeopardy. And there is still no guarantee a vaccine for the virus will be ready in the near term.
A strong summer gives stocks an even higher perch from which to fall, Mr. Emanuel said. And when the market is down from the end of August through Election Day, that is bad news for the incumbent party.
There have been six instances when in an election year the market fell from the end of August through Election Day, he said. It happened in 1932, 1960 and 2008, when Republicans held the White House. It also occurred in 1952, 2000 and 2016, when Democrats held the White House.
All six times, the incumbent party lost the election.
Yet it is hard to say whether stocks drive elections or the other way around, said Shawn Snyder, the head of investment strategy at Citi Personal Wealth Management.
For one thing, if investors think the incumbent will win, they anticipate less policy change and are therefore less likely to shift their portfolios ahead of an election, he said. Conversely, if they expect the incumbent to lose—and anticipate greater policy change—they may position differently by buying and selling various stocks.
National polls would indicate investors should prepare for change. A recent NBC/WSJ poll showed Joe Biden leading President Trump, 50% to 41%. The gap, though, was narrower in several key states, including Ohio, Texas and Florida.
One thing on which many analysts agree: The winner of the election won’t be as big of an influence on the stock market as some politicians suggest.
“A good company with good earnings is more of a driver than Washington," Mr. Snyder said.
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