After all, the identity of who will occupy the White House is an important variable that drives the market, influencing all kinds of political decisions that in turn can influence the economy as a whole. And since markets are known to hate uncertainty, it’s only natural for investors and their advisers to try to figure out who exactly will be the decision maker at 1600 Pennsylvania Avenue.
While there is no shortage of indicators that forecasters like to cite as their own crystal ball in each election cycle, some have certainly proven to be more popular and indeed more accurate than others. Here are some of the Wall Street favorites and what they say about who will win the presidency this November.
The stock market may not be a completely accurate reflection of the state of the overall economy, but it is a pretty good measure of investor confidence in American companies and the business environment in general.
When it comes to elections, a bear market can be viewed in two ways. On the one hand, it could indicate negative business sentiment, increasing the likelihood that voters will decide to announce some changes in Washington. And on the other hand, a sunken market can be read as a sign that investors believe a change is imminent and are choosing to stay on the sidelines until political uncertainty passes.
There are few broader and more popular reflections of the US stock market than the S&P 500, so it is not surprising that the S&P is a favorite of Wall Street forecasters when it comes to the presidential election. In fact, the folks at Boston-based stock brokerage LPL Financial say that the benchmark has accurately predicted the winner of the presidential election 87% of the time since 1928, and every time since. 1984.
The LPL metric is very simple: When the S&P 500 is trending up during the three months leading up to the election, the ruling party generally maintains control of the White House. When you are trending down, that usually means a change is necessary.
For example, LPL senior market strategist Ryan Detrick says look no further than 2016. Although Hillary Clinton was a big favorite ahead of the fall presidential election, a tepid S&P 500 did not bode well for her.
But he adds that this year, things are exceptionally difficult to read. While recessions like the one the US economy experienced this year in the wake of the coronavirus pandemic are often a surefire sign “that the headline is not going to win,” “In our opinion, the election will likely be much closer than the polls say,” according to Detrick, pointing to a continually bullish stock market as a justification. “The stock market has a fun way of predicting these things. If the incumbent loses, there is almost always some nervousness, because the market does not like uncertainty. “
But TD Ameritrade’s Kinahan notes that investors could be bracing for some uncertainty after all. It points out how futures contracts that track the CBOE volatility index, a popular measure of perceived volatility in the stock market, are “elevated” for several weeks after the November 3 election. That could indicate that investors are wary of the uncertainty that could stem from a potentially delayed result, due to the tens of millions of votes expected, not to mention the president’s own refusal to commit to accept the election result.
“I think it’s a completely new element in this election that we haven’t covered before,” Kinahan says of the potential for post-election volatility.
As if 2020 wasn’t unpredictable enough, it could be that the year’s presidential election is beyond the scope of any indicator we have to offer.
