Does the stock market forecast the winner of the US presidential election? Many argue that this is the case, citing the historical correlation between the incumbent party that keeps the White House and the strength of the stock market in the months leading up to November election day.
Given President Donald Trump's dealings with the stock market, he apparently agrees. He recently tweeted that investors' 401 (k) will crumble and disappear if he isn't re-elected – although a major Wall Street company will see a completely different result for pension savers if Trump's alleged challenger Joe Biden is elected.
Read: How to position your portfolio for a presidency by Joe Biden
I'm not so sure about this alleged correlation between the stock market and the incumbent's chances of keeping the White House. Think about what I found when analyzing the Dow Jones Industrial Average
In all US presidential elections since 1900, I've looked for correlations between the strength of the pre-election Dow and whether the incumbent political party retains the White House. I measured this strength over periods as short as the previous month, up to the entire period since the beginning of the year (10+ months).
The results do not inspire statistical confidence. While some of the correlations appeared to be impressive, the majority were not significant at the 95% confidence level that statisticians often use to determine if a correlation is real. The lack of a consistent pattern suggests that there are fewer than you think, and investors shouldn't count Trump's re-election opportunities, even if the stock market does poorly until election day.
For example, the strength of the stock market since the beginning of the year on election day has not correlated with the chances of the incumbent party. Nor is the strength of the market in the eight months before the election. Oddly enough, however, the result becomes statistically significant if the focus is on market strength over a period of time between the two – especially nine months instead of eight or ten.
If you can't make a theory about why market strength should predict election results over a nine-month period, but not over a slightly shorter or longer time horizon, we should reject this obvious correlation.
The same inconsistency occurred when I focused on shorter periods. The market return in the three months before the election correlates significantly with the opportunities of the established party – but not in the 1-month or 6-month periods before the election day. This is particularly important, since one factoid that is currently circulating on Wall Street is that the stock market return can predict the outcome in the three months before the election.
Watch the betting markets
If these results are not enough to make you question the stock exchange record as an election helper, check out electronic betting markets like PredictIt.org and the University of Iowa's Iowa Electronic Markets.
In these online futures markets, users can bet on different results, e.g. B. whether Trump wins re-election. The futures that are traded on these websites are all-or-nothing contracts that pay 100% when the respective result occurs, and nothing when they do not. Accordingly, prices reflect investors' collective bets on the likelihood of this outcome. Extensive research has shown that online betting markets can predict the outcome of the presidential election better than opinion polls.
The correlation of stock market fluctuations with those of the Trump contract at PredictIt.org, as shown in the graphic above, gives an insight into investors' assessment of the president's re-election opportunities. As of July 6, Trump's re-election to PredictIt.org is 40% more than 50% less than three months ago. In contrast, in these three months the S & P 500
These results make it difficult to argue that if Trump's re-election opportunities continue to decline, the stock market will go down.
Mark Hulbert regularly writes articles for MarketWatch. His Hulbert Ratings track investment newsletters that pay a flat fee for the exam. He can be reached at email@example.com
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