Can the Stock Market Predict Presidential Elections?

 

The year 2020 will be a year to remember for generations to come. Our grandchildren will undoubtedly study and learn about the COVID-19 pandemic, economic lockdown and volatility of the stock market in their history classes. Since it is also an election year there are no shortage of prognosticators looking into their crystal balls and making predictions about who will win the White House in November.  One reality that is very hard to argue against is that voters usually vote according to the health of their wallets.

We are all familiar with consumer activism which promotes the idea that every consumer votes whenever they choose to purchase one product over another.

However, the stock market has a solid track record of predicting the winner of the US presidential elections as well.

The stock market Presidential Election indicator works like this:

When the S&P 500 Index is trending higher measured by the net change from three months before election day, the incumbent party usually wins and retains the White House.

When the S&P 500 Index is lower on election day, measured compared to three months before election day, the incumbent party usually loses.

Simple enough!  Isn’t it?

How accurate is this stock market barometer?

  • Since 1984 we have had 9 Presidential elections and it has been 100% accurate.

  • Since 1928 we have had 23 presidential elections and it has been accurate 20 times, or 87%!

Election Day President Party Affiliation Stock Market 3 Months  Performance Into Election Day Did Incumbent Party Win or Lose? Was The Stock Market A Successful Predictor of The Presidency?
11/6/1928 Herbert Hoover Republican 13.6% WON YES
11/8/1932 Franklin Roosevelt Democrat -2.6% LOST YES
11/3/1936 Franklin Roosevelt Democrat 7.9% WON YES
11/5/1940 Franklin Roosevelt Democrat 9.7% WON YES
11/7/1944 Franklin Roosevelt Democrat 2.3% WON YES
11/2/1948 Harry Truman Democrat 5.4% WON YES
11/4/1952 Dwight Eisenhower Republican -3.3% LOST YES
11/6/1956 Dwight Eisenhower Republican -3.2% WON NO
11/8/1960 John F. Kennedy Democrat -1.3% LOST YES
11/3/1964 Lyndon Johnson Democrat 3.9% WON YES
11/5/1968 Richard Nixon Republican 6.0% LOST NO
11/7/1972 Richard Nixon Republican 3.0% WON YES
11/2/1976 Jimmy Carter Democrat -1.0% LOST YES
11/4/1980 Ronald Reagan Republican 6.9% LOST NO
11/6/1984 Ronald Reagan Republican 3.6% WON YES
11/8/1988 George H. W. Bush Republican 2.8% WON YES
11/3/1992 Bill Clinton Democrat -0.4% LOST YES
11/5/1996 Bill Clinton Democrat 6.7% WON YES
11/7/2000 George W. Bush Republican -3.4% LOST YES
11/2/2004 George W. Bush Republican 2.8% WON YES
11/4/2008 Barack Obama Democrat -24.8% LOST YES
11/6/2012 Barack Obama Democrat 1.9% WON YES
11/8/2016 Donald Trump Republican -2.3% LOST YES
        Total Elections 23
        Years Stock Market Was Correct 20
        Percentage 87.0%

There have only been three Presidential elections where the stock market incorrectly forecasted the winner of the presidential election.

Those were:

  1. In 1956, incumbent Dwight D. Eisenhower was reelected even though the S&P 500 fell -3.2% in the three months before the election.
  2. In 1968, the incumbent Democratic party lost to Richard Nixon despite the S&P 500 rising 6% in the three months before the election. The nation at that time was embroiled in the Vietnam war. Candidate Nixon campaigned on a secret plan to quickly exit the war.  The secret plan took over six years to unfold and was still in place when he resigned in August 1974.
  3. In 1980, incumbent Democrat Jimmy Carter lost to Ronald Reagan even though the S&P 500 rose 6.9% in the three months before the election. Reagan campaigned actively on what he called the Misery Index which was the sum of Inflation and Unemployment. The higher the index Reagan proclaimed, “the more is the misery felt by average citizens.”

In 2016, the stock market sold off very sharply a week and a half before the election.  Followers of this indicator were convinced this occurrence was an early Barometer that Hilary Clinton was destined to lose. The three-month performance of the S&P 500 from August 8, 2016 till November 8, 2016 was down -2.3%.

So what does this mean moving forward to the election in November 2020?  The analysis I shared with you was based on the closing prices for the S&P 500 Index. However, today an Index like NASDAQ did not exist until February 1971, and it did not become wildly popular until the late 1990’s.

August 3, 2020 was exactly three months before the presidential election.  Here are the closing prices of the Major Stock market Indexes as of August 3, 2020:

S&P 500 Index – 3,294.57

Dow Jones Industrial Average – 26,646.50

Nasdaq Composite Index – 10,901.13

Trump supporters would expect that a closing price above these levels on November 3, 2020 would re-elect the President.

Biden Supporters would expect that a closing price below these levels on November 3, 2020 would make Joe Biden the next President.

It will be interesting to see how it all plays out!

While I find this forecast very fascinating, intriguing and statistically valid, it is not the type of forecast that you can trade. We will be watching these price levels very closely as we get closer to election day.

Most traders define risk in one of two ways. The first method is the probability of earning a profit versus the probability of incurring a loss. The second way is the amount of money you could lose compared to the amount of money you could win. But the third way of understanding risk is in ignoring how global financial markets have become intertwined.

One day we’re up 1,000 points… one day we’re down 1,000 points.

The media blames coronavirus… the election… Fed rates… oil prices…

These are all great story lines that will create enough content to fill up a 24-hour news cycle.

But don’t let what the talking heads are saying, get in the way of being on the right side of the trend.  Don’t let opinion laced forecasts by talking heads trap you on the wrong side of the trend!

Whether Biden Wins or Trump Wins I can assure you that artificial intelligence will continue to crank out winning trades for Power Traders!

Want to become a great trader?  Use Vantagepoint A.I. to keep you on the right side of the trend.

Mistakes are financially costly but for machine learning, it is the pathway to mastery and excellence.  The real education in trading always lies in learning from the losers.

Most humans have a really hard time learning from bad experiences. The ego gets in the way, each and every time.

Since artificial intelligence has beaten humans in Poker, Chess, Jeopardy and Go!, do you really think trading is any different?

Intrigued?

I invite you to check it out at our Next Live Training.

It’s not magic.  It’s machine learning.

Make it count.