With just one year away we can expect Main Street and Wall Street to begin to focus on the next US Presidential election. Many studies have been conducted on the US presidential elections and its relationship to the US stock market and vice versa. Since the US stock market is cyclical it tends to discount US business cycles months and quarters ahead of an US economic top or a bottom. So, can the US stock market also predict the outcome of the next US Presidential Election?
Based on our technical studies dating back to 1928 for US equities (i.e., S&P 500 Index and Dow Jones Industrial Average) the most profitable year of a 4-year US Presidential Election year cycle remains the third year (13.5% average SPX return), followed by the fourth year (7.0%), second year (4.5%), and then the first year (5.0%). True to form we are again witnessing strong US stock returns (i.e., +22.65% SPX YTD) for the third year (2019), which is also another pre-election year.
Historically, Election year results have not been a good predictor of future stock market returns. However, it turns out the stock market has been quite reliable in predicting who will be elected as the next President of the United States. The stock market performances three months prior to the elections have been an excellent barometer as to who will occupy the White House for the next four years. If the stock market has recorded gains over the three months leading up to the election, then the incumbent party’s candidate is likely to be the next President. On the other hand, if the US stock market incurs losses over those same three months before the election then a new party will likely occupy the White House.
In 20 of the last 23 US Presidential Elections the 3-month stock market performance indicator have accurately predicted the next US President. Only three times did it failed to forecast the next US President, namely during 1956, 1968, and 1980. With a batting average of 87% the statistics are quite compelling. Looking deeper into the numbers, of the 23 Presidents elected since 1928, 14 were preceded with SPX gains in the 3 months prior to the election. In 12 of 14 occurrences, the incumbent or the incumbent party won the Presidency. In 8 of 9 elections preceded by three months of stock market losses, the incumbents lost the White House.
From 1928-2016, when the Democratic party in control during the Election year in question the average SPX return is a respectable 7.6%. During the same time period, when the Republican party is in control, the average SPX return jumps up to 15.26%. The average SPX returns for all Presidential Election years is around 11.28%. It is apparent from the information provided investors tend to favor a Republican President over a Democratic President. Will the incumbent party (Republican President Trump) once again win the Presidency of the United States in next year's election?
For further information please refer to the enclosed charts and statistics of the previous 23 US Presidential Elections and the respective SPX performances since 1928.