It’s looking good for a Joe Biden win based on the history of the S&P 500 in election years dating back to 1944. The stock market could be one of the best indicators of who will win the 2020 presidential election.
When the stock market makes gains in the three months prior to a presidential election, it usually means a victory for the incumbent party, while a negative move signals a loss, according to the “Presidential Predictor.”
This has been true since 1928, when the forerunner to the S&P was first formed. The stock market has been wrong just three times in the last 23 presidential election years, according to wealth manager LPL Financial, an independent broker-dealer.
The index has predicted the election winner 87 percent of the time, and, since 1984, it has been accurate every presidential election year.
The Presidential Predictor was made popular by Sam Stovall, managing director of U.S. equity strategy at New York-based investment research firm CFRA (Center for Financial Research and Analysis), Market Watch reported.
More specifically, the Presidential Predictor tracks the S&P 500 index’s performance from July 31 to Oct. 31 in presidential election years.
On Friday, the last trading day in October, the index finished the day down 40.15 points, or 1.2 percent, to close at 3,269.96, below the July 31 close at 3,271.12.
Polls show Democratic challenger Joe Biden beating Trump around the U.S., but his lead has narrowed in recent weeks — similar to what happened with Hillary Clinton in 2016. Biden appears to be ahead in key battleground states, though strategists say Trump could still pull out an Electoral College win, but that would be more difficult than in 2016.
“The Presidential Predictor implies, but does not guarantee, a Biden victory,” Stovall said in an email after the closing bell Friday.
The Dow and S&P 500 were up on Monday, the day before Election Day. Wall Street expects Biden will win the presidency and Democrats will retake the Senate and maintain control of the House.
“Both benchmarks are retracing some of their losses from last week, when they recorded their worst week since March,” CNN reported.
Some analysts say the stock market cares more about which party controls Congress than it does about who wins the White House. Stocks typically thrive in legislative gridlock in Washington, D.C. and a split Congress has historically been best for investors, USA Today reported.
Divided power in November would make it harder for lawmakers to undo policy measures already in place, experts say.
Stocks typically favor Republican policies, but investors want more fiscal stimulus to boost the economy, which is threatened by a third wave of skyrocketing coronavirus cases. Investors predict that a “blue wave” will improve the chances of a stimulus deal getting passed.
To win, Trump needs a polling error much bigger than the one in 2016, New York Times reported. However, several factors that led to the polls being wrong four years ago no longer apply. For one thing, Biden has a bigger lead than Clinton had and she won the national vote.
Four years ago, national polls showed Clinton ahead by 4 percentage points, close to her eventual 2.1-point margin in the national vote. This year, the national polls show Biden ahead by 8.5 percentage points.
Four years ago, national polls showed Trump making huge gains with white voters without a college degree. This year, national polls show Biden making big gains among white voters without a degree.
Four years ago, there were far more undecided or minor-party voters. In 2016, 15 percent were undecided compared to 2020, when an estimated 4.6 percent are undecided or backing a minor-party candidate, according to the FiveThirtyEight average.
The Presidential Predictor does not have a perfect accuracy rate.
In 1956, Republican President Dwight Eisenhower defeated Democratic challenger Adlai Stevenson despite the index falling 7.7 percent in the three-month period.
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The indicator failed twice to correctly predict defeat for the incumbent party — once, in 1968, when Republican Richard Nixon defeated Democratic nominee Hubert Humphrey and 1980, when Ronald Reagan defeated Democratic President Jimmy Carter.
In all three cases, the predictor fail accompanied extraordinary geopolitical factors, according to Stovall.
In 1956, stock-market weakness was tied to the Suez Crisis after Egyptian President Gamal Abdel Nasser decided to nationalize the Suez Canal. In 1968, the stock market was up but the U.S. was embroiled in the Vietnam War. In 1980, the Iran hostage crisis was a key issue.
In 2020, the market’s weakness in the run-up to the vote “is being driven by the renewed surge in covid-19 and what it portends for future GDP/EPS growth,” Stovall said, referring to gross domestic product and earnings per share, Market Watch reported.
Even if the polls are wrong, evidence still points to Biden winning, according to Andy Laperriere and Don Schneider at Cornerstone Macro. “If the polls are roughly right, Joe Biden is going to win the election comfortably and we will know that before midnight tomorrow,” they said.
