How the Stock Market Can Predict Who Will Win the Presidential Election
A rising market in the months before Election Day is a good sign for the incumbent party.
A lot of people think that Election Day results foretell how the stock market will behave in the coming months and years. A Mitt Romney victory, some believe, would be good for stocks. After all, Republicans are friendlier to Wall Street than are Democrats.
But there's no historical evidence to support this notion. Indeed, since 1928, the stock market has produced ever-so-slightly better results, on average, when Democrats occupy the White House. The median price gain for Standard & Poor's 500-stock index during Democratic presidencies has been 27.5%, compared with 27.3% during Republican administrations, according to the Leuthold Group, a Minneapolis investment research firm.
Not only that, but Barack Obama -- cast by Republicans as an enemy of free enterprise -- has presided over one of the strongest stock markets since 1928. If the S&P 500 closes above 1443 on Inauguration Day (it ended at 1457 on September 24), the market's performance during Obama's first term will rank second-best of all time, behind only the results during the first term of another supposed archfoe of business, Franklin D. Roosevelt.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
No, if you want to forecast the stock market, look at price-earnings ratios, consider the troubles in Europe and China, examine analysts' earnings predictions, worry about the fiscal cliff -- look at anything except presidential polls. (See 6 Big Worries for This Bull Market.)
But if you're a political junkie like me, you'll want to use the stock market to predict who will win the election. That is something the market excels at.
Jim Stack, editor of InvesTech Research, an investment newsletter, has crunched the numbers. His findings? Since 1900, the direction of stock prices in the two months prior to Election Day has predicted the winner 89.3% of the time. "A rising stock market indicates an improving economy, which means rising confidence and increases the chance of an incumbent's reelection," he says.
Even the market's bad calls were in years when the market didn't move much in the two months before Election Day. In the three elections during which the indicator failed, the Dow Jones industrial average moved 3.1% or less during the two-month period.
The main shortcoming of Stack's work is that you can't tell the outcome until Election Day. People like me want to know sooner.
Fortunately, Sam Stovall, chief stock strategist at S&P, uses an indicator with a longer lead time. Looking at S&P 500 prices since 1900, he has found that the market action between July 31 and October 31 has correctly forecast the outcome of the presidential campaign 82% of the time.
So how are Romney and Obama doing on Wall Street? The S&P closed at 1379 on July 31 and 1457 on September 24. That's a gain of 5.7%. The market would have to drop at least 5.4% in five weeks for Romney to win -- assuming that this indicator is on the money this year.
Of course, the indicator was wrong 18% of the time. In 1912, Democrat Woodrow Wilson unseated Republican President William Howard Taft despite a rising market in the pivotal three-month period. The market also gained ground in 1932, even as Roosevelt, a Democrat, defeated Republican incumbent Herbert Hoover amidst the Great Depression. The market fell in 1956, but Republican Dwight Eisenhower still was reelected. President Richard Nixon beat his Democratic rival, Hubert Humphrey, in 1968 despite a rising market, and Republican challenger Ronald Reagan ousted Democratic President Jimmy Carter in 1980, even as the market climbed.
Stovall postulates that third parties may have played havoc with his indicator. Teddy Roosevelt ran as a Bull Moose candidate in 1912, George Wallace ran as an independent in 1968, and John Anderson, another independent, took some votes from Carter in 1980. But the indicator was just plain wrong in 1932 and 1956, Stovall concedes.
In a year during which pollsters can only get about one in ten voters to pick up the telephone to answer questions, the stock market indicator looks like a pretty good bet. I'll be watching to see how it turns out -- and, of course, with much more interest, how the market does under the winner.
Steven T. Goldberg is an investment adviser in the Washington, D.C. area.
Kiplinger's Investing for Income will help you maximize your cash yield under any economic conditions. Subscribe now!
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
2025 Tax Reform: Will the SALT Deduction Cap Be Repealed?
Tax Deductions Some lawmakers say it’s time to end the $10,000 cap on state and local tax deductions.
By Kelley R. Taylor Published
-
Affordability Crisis: Florida Votes to Increase Property Tax Break
State Tax Property taxes have skyrocketed nearly 60% within the last five years in Florida, and its constituents are finally doing something about it.
By Gabriella Cruz-Martínez Published
-
AI Regulation is Looming: Kiplinger Economic Forecasts
Economic Forecasts Find out what Washington and regulators have planned for artificial intelligence.
By John Miley Published
-
Where the Midterm Election Races Stand Today
Economic Forecasts In a tight race, these state elections may make the difference when midterm results are announced in November.
By Sean Lengell Published
-
These States Could Legalize Marijuana Soon
Politics Initiatives on ballots this November reflect growing bipartisan support for legal recreational pot.
By Sean Lengell Published
-
ESG Gives Russia the Cold Shoulder, Too
ESG MSCI jumped on the Russia dogpile this week, reducing the country's ESG government rating to the lowest possible level.
By Ellen Kennedy Published
-
The Biden Tax Plan: How the Build Back Better Act Could Affect Your Tax Bill
Politics Depending on your income, the Build Back Better Act recently passed by the House could boost or cut your future tax bills.
By Rocky Mengle Published
-
The Kiplinger Letter’s Must-Read Political and Economic Forecasts for 2021
Politics Our annual outlook explores what to expect from the U.S. economy, the new Congress and next administration, trade tensions, cryptocurrency, self-driving trucks and more.
By The Kiplinger Washington Editors Published
-
Federal Debt: A Heavy Load
Economic Forecasts The debt continues to grow, but record-low interest rates could ease the long-term damage.
By David Payne Published
-
What Biden Will Do: 23 Policy Plays to Expect From the Next Administration
Politics The Kiplinger Letter forecasts President-Elect Joe Biden’s biggest priorities -- and the likelihood of progress on them.
By The Kiplinger Washington Editors Published