Can Stocks Predict Another Election Outcome?
‘Tis the season for political polls, and the news is currently saturated with them, aiming to forecast who will be the next president. But some experts argue that there is another way to predict the presidential outcome: stocks.
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“While polls, betting odds and forecasts can provide valuable insights into potential election outcomes, the data can be noisy,” Adam Turnquist, chief technical strategist, LPL Financial, wrote in a blog post. “To avoid some of that noise and potential biases, keep an eye on how the market performs during the three-month period before election day — a period that officially starts on Monday, August 5.”
According to Turnquist, since 1928, the party in power won the election 80% of the time “when the S&P 500 was positive during the three months leading up to an election.”
On the other hand, when the S&P was lower, “the incumbent party lost the election eight of the last nine times.”
“When combined, market performance has “predicted 20 of the last 24 elections,” wrote Turnquist.
Asked whether these findings were surprising, Turnquist said “not entirely,” as he argued that the market does not like uncertainty, which a new administration in the White House can bring.
“And if polls tilt in favor of the non-incumbent party coming into election day, it would not be surprising to see the market decline on the news. And vice versa if the incumbent is favored to win,” he wrote.
Will It Hold True During This Election Cycle?
According to Carol Schleif, CIO, BMO family office, “correlation is not causation” as the saying goes, and markets over the intermediate and long term tend to be more reflective of economic and business fundamentals.
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“Theoretically it wouldn’t be surprising that strong markets were reflective of a solid economy which could theoretically benefit an incumbent party,” said Schleif, adding however, that there are a host of things that influence political outcomes such as voter turnout, demographics and hot button issues.
Several experts also argued that while this is an “intriguing prospect,” it’s critical to approach it with caution.
For instance, in this election cycle alone there have been choices and events that have undoubtedly shifted the possibility set of November outcomes, said Peter C. Earle, senior economist, American Institute for Economic Research, citing the first presidential debate, the attempted assassination of former president Donald Trump and the pivot to vice president Kamala Harris.
“And if bad news were to come out about most or all of the Magnificent 7 stocks — Apple, Microsoft, Alphabet, Amazon, NVIDIA, Meta Platforms and Tesla — a few days before November 5, there would be little if any impact on election results,” he added.
Earle further argued that if there is causation it’s likely of a simultaneous, two-way nature: The performance of equities can influence presidential election outcomes by affecting voter confidence via perceptions of the economy.
“At the same time, expectations about a given party’s economic policies can drive market movements before an election,” added Earle.
What Should Investors Do (If Anything) Based on These Findings?
As Turnquist noted, what happens in Washington can play an important role in our daily lives and help shape the economy, but politics alone do not drive markets or the economy. “There are other more powerful macro forces catalyzing economic expansions and contractions, such as the health of corporate America and the consumer, not to mention monetary policy.”
In turn, for the long-term investor, political opinions are best expressed at the polls and not in portfolios, added Turnquist.
For instance, he said that if you invested $100,000 in the S&P 500 in 1950, but only remained invested during years when a Democrat was president, you would have around $3.1 million today (excluding dividends), compared to $1 million if you only invested when a Republican was president.
“While this gap appears wide, it lacks in comparison to the $32.6 million you would have made if you bought and held the S&P 500 over the entire time frame, giving credence to the adage of time in the market beats timing the market,” he said.
Other experts echoed the sentiment, saying that while the link between stock market performance and election outcomes is interesting, it’s important to remember that each election is unique.
“While the market has predicted outcomes in the past, relying solely on it for future predictions can be risky. Investors should stay focused on a balanced strategy that fits their personal financial goals or is advised by their financial advisors,” said Robert Hodgins, founder of Sand Hill Road Technologies Fund.
Editor’s note on election coverage: GOBankingRates is nonpartisan and strives to cover all aspects of the economy objectively and present balanced reports on politically focused finance stories. You can find more coverage of this topic on GOBankingRates.com.
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This article originally appeared on GOBankingRates.com: Can Stocks Predict Another Election Outcome?
