What is the market telling us about the outcome of the election?
The uncertainty around the upcoming national elections has many investors concerned.
The resultant future policy directives coming out of Washington will significantly affect the economy and stocks.
As a financial advisor, I'm not concerned with politics. However, I am focused on the markets.
Many people are trying to predict the outcome of the election. There are polls, and there are the betting odds, considered to be more accurate than polls.
Not to be left out, the stock market has historically been a good predictor of who will win the election.
The SP 500 index performance in the three months before the election has proven an excellent forecaster for winning the Presidency. In the past, a rising market in this period has indicated that the incumbent will win. Stock market losses, by contrast, predicted the opposition party wins.
Stock market returns in these three months have correctly forecasted the election result every time since 1984. Going back to 1928, it has been accurate 87% of the time.
Since August 3, the SP 500 is up 7%, favoring the incumbent.
Another Indicator is a Recession within Two Years of the Election
The economy has also amazingly forecast the winner of every presidential election going back to Calvin Coolidge. In the past, if a recession has occurred within two years of the election, the incumbent President has lost.
Coolidge won with a recession on his watch. But Coolidge had inherited the downturn from President Warren Harding, who passed away while in office. By the time of his re-election, the Roaring Twenties had begun, and the economy was booming.
2020 is no ordinary election year, due to the Covid 19 pandemic and the resulting severe recession. With two strong indicators pointing in different directions, it will be interesting to see how the election ultimately pans out.
Which Party Controlling Congress is Better for Stocks?
In the past, a Republican-controlled Congress has led to slightly better SP 500 index returns than a Democrat Congress. However, to the chagrin of both parties, the winner is a Split Congress! Maybe gridlock isn't so bad after all?
What about Election Uncertainty?
The election may be close, and there is the possibility we may not know the results for weeks. Holding the election during the pandemic adds extra challenges. The election could even wind up being settled by the courts.
Remember though, We’ve actually had uncertain results before, in 1960 and in 2000. In both cases, the market reaction was muted. It seems likely that while the election results may be delayed, our system should prevail, and a timely transition of power seems likely.
I suspect the stock market and economy are not really predicting who will win a Presidential election. Rather, when the stock market is going up, this means the economy is doing well. And when the economy is doing well, people are happy and re-elect the incumbent.
But I don't want to be a two handed economist, so I will take a stand on who I believe the will the election. The strong performance of the stock market is telling us that the market thinks it will be the real winner.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies will be successful.