Do Stocks Predict Presidential Elections?

Interesting analysis, from Dan Clifton, head of policy research at Strategas Research Partners, on what the 3 months prior to election means:

“Can the stock market predict who will be the next leader of the U.S.? Dan Clifton, head of policy research at Strategas Research Partners, argues that it can.

His research shows that the market’s trajectory in the three months prior to the voting has correctly forecast the outcome in 19 of the 22 presidential elections going back to 1928, including all those since 1984.

Clifton’s research shows that if stocks are higher in those three months, the incumbent party wins, and vice versa.

Clifton says much depends on the first debate, which “has historically been important, particularly in close elections.” The market took off after GOP incumbent George H.W. Bush beat Michael Dukakis in the 1988 race’s initial debate. If Clinton, a member of the party in the White House, “slips up in [Monday’s] debate, the market is going to start pricing in a Trump victory,” Clifton contends. That would be temporarily negative for the S&P 500, he adds.

But if Clinton wins the face-off, it will be good for stocks, at least in the short term. “When the incumbent party holds, the market tends to rally” after the election, Clifton says, adding that a victory for the ins often reflects voters’ belief that the economy has avoided a recession. Off to the races.

— Robin Goldwyn Blumenthal, How Stocks Can Predict the Presidential Elections  


There are two things that readers/investors/pundits need to be aware of:

First, beware confusing causation and correlation — meaning, incumbents win and markets go higher not reflecting each other, but because of the same underlying reasons.

When the economy is good, profits are higher, employment data good, wages rise and sentiment positive. Those factors are good for incumbents.

When the economy is bad, profits are lower, employment data poor, wages flat and sentiment negative. Those factors are good for challengers.

Second, be cautious about picking any single day as proof that the market “likes” your preferred candidate. It is plain and simple confirmation bias writ large. I see people cherry picking a big up (or down) day as evidence in favor of their choice — but blithely ignore the next day’s market reversal.


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