US Presidential Election Barometer

Voters in America will soon decide on 11/3/20 whether Trump remains in the White House for another four years or whether Democratic Joe Biden will be the next President. As election day approaches, polls are hard at work trying to gauge the mood of the nation by asking voters which candidates they prefer.

National polls may be a guide as to the popularity of a candidate ahead of the election. But are they good at predicting the results of the election? In the past presidential election in 2016, Hillary Clinton led in the polls. Hillary won the popular vote by over three million more votes than Donald Trump. But Hillary still lost the election because of the electoral college system. It seems that winning the most votes does that guarantee a win. A candidate still needs to win 270 electoral college votes to secure the election.

Today, Joe Biden, the Democratic nominee, is currently leading Donald Trump in almost all the national polls. These polls show Biden with a 10-point lead over Trump with 2-weeks before the election. Nonetheless, 2020 and the November election will be a year to remember for generations to come. We are living through unprecedented times. When was the last time that a global pandemic of this magnitude disrupted our everything lives? It is not business as usual, and we do not know when things will return to normal. Unprecedented sums it up. COVID-19 pandemic, global economic lockdown, market volatility, and a host of macro and geopolitical uncertainties have impacted investors and voters alike.

Since this is another election year, we have also been closely tracking the polls and monitoring the numerous market pundits and prognosticators as they make their predictions as to who will win the White House. Historically, it is difficult to argue that most voters tend to vote according to the health of their wallets and pocketbooks. Often when the economy is doing well, the incumbents will stay in office and vice versa. Some say this election will be different because the COVID-19 pandemic has shifted the focus of many voters toward health issues rather than their finances.

Since the stock market is forward-looking, it has a remarkable track record at predicting the outcome of the health of the US economy and hence the US presidential elections. The 3-month US presidential election barometer states that the SPX returns in the three months before the election can help decide whether the incumbent party wins or loses the White House. Positive returns in SPX during the 3-month window typically lead to the incumbent party retaining the White House. On the other hand, losses in the SPX during the same period warns of the incumbent party losing the White House. So, how precise is this stock market barometer in predicting the next President?

Dating back to 1928 for US equities (i.e., S&P 500 Index and Dow Jones Industrial Average), the barometer has been accurate. For instance, since 1984, it has accurately called 9 out of 9 US presidential elections. Since 1929 or in the past 23 presidential elections, the barometer has accurately predicted the outcome of 20 elections. The track record is even better than most of the most popular stock barometers, such as the January barometer, super bowl barometer, 4-year US presidential election year cycle, among others.

If you recall, the 4-year US presidential election year cycle states the third-year of a US presidential cycle has the best SPX returns with average gains of 13.5%. The fourth-year averaged SPX returns of 7.0%. The second-year return returned 4.5%, and the first-year produced gains of 5.0%. True to form, US stock returns this year is +6.57% YTD in yet another election year cycle (4th year).

Although the 4-year US presidential election year barometer has not been a good predictor of future stock market returns, it turns out the US stock market has been quite reliable in predicting the next US President. The stock market performances three months before the elections have been an excellent barometer as to who will occupy the White House for the next four years. As we have mentioned earlier, if the stock market has recorded gains over the three months leading up to the election, then the incumbent party's candidate will likely be the next President. On the other hand, if the US stock market incurs losses over the 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 has accurately predicted the next US President. Only three times did it failed to forecast the next US President, namely during 1956 (Eisenhower VS Stevenson), 1968 (Nixon VS Humphrey), and 1980 (Reagan VS Carter). 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 3-months of stock market gains before 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.

Another interesting point to note, from 1928-2016, the average SPX return for all Presidential Election years was 11.28%. When the Democratic party was in control, the average SPX return was a respectable 7.6%. However, when the Republican party was in control, the average SPX return jumped to 15.26%. It would appear the US stock market (SPX) favors a Republican President over a Democratic President.

As of 10/20/20 close, the SPX has gained 6.57% YTD so far. With 2-weeks before the next presidential election, the 3-month SPX return is a healthy 4.51%. Trump supporters would expect that if SPX (3,443.62) closed on 11/3/20 above 3,294.61 (8/03/20 close), this would imply Donald Trump will win a second term. On the other hand, Biden supporters would expect an SPX closing price below 3,294.61 (8/03/20) would result in Joe Biden becoming the next President. We will soon find out how this all plays out in less than 2-weeks from today!

For further information, please refer to the enclosed charts.