Are Stocks an Accurate Predictor of Presidential Elections?

There is a long-held belief by many in the forecasting world that the direction of the US stock markets in the months leading up to presidential elections is a solid indicator of who will be the next President of the United States. The general idea is if the stock market is strong just ahead of the election, the incumbent party usually wins; if the market is weak, the incumbent usually loses.

It turns out that LPL Financial, the nation’s largest independent broker-dealer, recently crunched the numbers on this topic and found some eye-catching results. According to LPL, since 1928, the stock market has accurately predicted the winner of the presidential election 87% of the time and every single year since 1984. Wow!

It is quite simple, says LPL: When the S&P 500 Index has been higher in the three months before the election, the incumbent party usually won – while when stocks were lower, the incumbent party usually lost.

LPL’s Senior Market Strategist Ryan Detrick explained it this way: “Think about it, no one expected Hillary Clinton to lose back in 2016, no one except the stock market that is. The Dow had a 9-day losing streak directly ahead of the election… setting the stage for the change in party leadership in the White House.”

But could it really be that simple? If the stock market rises in the three months before the election, the incumbent candidate wins 87% of the time? As you might expect, not everyone agrees. Mark Hulbert, editor of the widely-followed Hulbert Financial Digest, is one respected  number-cruncher who has serious doubts.

Hulbert recently analyzed the Dow Jones Industrial Average’s annual return leading up to the presidential elections in every election year since 1900. He searched for any correlations between the Dow’s pre-election strength and whether the incumbent political party retained the White House. He measured that strength over periods as short as one month prior, to as long as the entire year-to-date period (10+ months) prior to elections.

What Hulbert found was that most correlations over the various time periods ahead of the election were “not significant” – meaning they were not high enough to meet the confidence level most statisticians require to determine if a correlation is indeed real.

So, in essence, Hulbert poo-poos the theory that the stock market’s performance just ahead of presidential elections is a reliable indicator – sort of.

As noted just above, Hulbert looked at every monthly time period ahead of the November election – from one month before to the 10+ months just before the election. In every time period Hulbert researched, there was no significant correlation to whether the incumbent won or lost based on stock market performance – EXCEPT FOR ONE.

What Hulbert found is that stock market performance over one specific period – 9 months before the election – did show a significant correlation to whether the incumbent president won or lost. Here’s what Hulbert concluded:

“But, strangely, when the focus is on market strength over a period whose length is between these two — specifically, nine months rather than eight or 10 — the result in fact does become statistically significant.”

Let me be clear: What Hulbert found is that none of the pre-election time periods he tested were relevant to the incumbent’s chances of winning or losing were significant, except for one– 9 months. According to Hulbert’s findings, the stock market’s performance in the nine months leading up to the election often has a significant influence on whether the incumbent wins or loses.

Hulbert stresses that we should not place too much importance on this one finding, and I agree – but for different reasons. Hulbert argues that we should not place a great deal of importance on it because it was contrary to the findings of all his other data points. In other words, he dismisses it as an outlier.

I dismiss it for a totally different reason. While this subject is certainly interesting enough to bring to your attention, it is NOTHING we want to consider when making investment decisions. Nothing.

Think of it this way. Would you consider changing your investments if the stock market stays strong from now to the election in November, knowing the odds are high that President Trump will be re-elected?

Or, would you consider changing your investments if the stock market declines from now to the election in November, knowing the odds are high that President Trump will be defeated?

In both cases, I assume your answer would be NO, as it should be. Good!

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