Why Trump Should Worry About What the Stock Market Says

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CNN
—

Clues to how this election cliffhanger will end may be hiding in an unlikely place: your 401(k).

As people try to make sense of the recent swings in the prediction markets and the dramatic changes in the stock price of former President Donald Trump's social media company, there is a far simpler prediction indicator with a surprisingly good track record.

It is noted that the party in the White House tends to remain in power when the US stock market rises before a presidential election.

In all but two elections since 1944, the incumbent party has won the race for the White House as the S&P 500 rose between late July and Halloween, according to Sam Stovall of CFRA Research, who prepared this election forecaster.

This indicator accurately predicted the winner 82% of the time.

That's why Trump, who closely follows the stock market and is obsessed with it as president, should be nervous about recent developments on Wall Street.

The S&P 500 rose 3.3% between the end of July and the end of October.

“When the market goes up, the incumbent party usually wins. If the market goes down, the incumbent party will be replaced,” Stovall said in a telephone interview with CNN on Monday.

Of course, this indicator was not always accurate. And it includes a relatively small sample size. There have only been 20 presidential elections since 1944.

Nevertheless, there is a certain logic behind it all.

If markets are rising before the election, it means investors are not worried about an impending recession. And a recession would be a reason for voters to throw the ruling party out of office.

“The market is an anticipator. When the market is down, it's because investors are expecting higher interest rates or a recession – both of which would negatively impact voters,” Stovall said.

That happened in 2008.

The S&P 500 took a nosedive of nearly 24% between late July and late October of that year. This period included the bankruptcy of Lehman Brothers, the implosion of AIG, and the government takeover of mortgage giants Fannie Mae and Freddie Mac.

With unemployment and foreclosures skyrocketing, voters decided it was time for change. The Republicans were voted out of the White House in favor of Democrat Barack Obama.

The market indicator was correct in 2016 and 2020

Vice President Kamala Harris may be relieved that the market has posted solid gains.

When the S&P 500 falls between late July and late October, Stovall says 89% of the time, the incumbent party has been replaced. The only incorrect reading is from 1956, when Dwight Eisenhower defeated Adlai Stevenson.

This indicator was also true for Trump's previous two elections.

In 2016, the S&P 500 fell 2.2% ahead of Trump's face-off with Democratic nominee Hillary Clinton. Clinton, who served as secretary of state in the Obama administration, lost to Trump despite being comfortably ahead in most polls in October.

And in 2020, the S&P 500 fell slightly (by just 0.04%) in the final months before the election. In the end, Trump lost to Joe Biden.

It is worth noting that this stock market forecast indicator has also been wrong in the past.

In 1968, an election year that shared some key similarities with 2024, the S&P 500 climbed nearly 6% in the final months before the election. And yet: Hubert Humphrey, the incumbent Democratic Party candidate, In the end he lost to Richard Nixon.

Stovall points out that the 1968 Democratic National Convention was held in Chicago, as it was this year, and Humphrey, like Harris, was an incumbent vice president who was nominated after the incumbent president suspended his campaign. Likewise, voters in 1968 were frustrated with the establishment.

“Democrats faced major headwinds in 1968 with Vietnam and today with the war on inflation and immigration,” Stovall said.

In 1980, Jimmy Carter lost re-election even though the market rose significantly in the months leading up to the election. Carter suffered from high inflation and the hostage crisis in Iran.

This year's pre-election boom is historic.

The S&P 500 ended October with an annual gain of 19.6%. That's the best performance in an election year through October since 1936, according to Bespoke Investment Group.

Of course, there are several reasons why markets are on the rise today.

Part of this has to do with optimism about a likely soft landing for the US economy and the Federal Reserve's decision to aggressively cut interest rates. Investors are still excited about AI Boom that sent tech stocks soaring. And some market strategists have pointed to hopes that Trump would win the White House and push through tax cuts that would help corporate profits.

But there is another market indicator that gives the Harris camp reason for hope.

According to Doug Ramsey, chief investment officer of The Leuthold, a rise in the Dow Jones Industrial Average in the 11 weeks leading up to Election Day has been found to “correctly predict a victory for the incumbent party” in 12 of the 13 cases since 1928. Group. And a decline in the Dow Jones accurately predicted a loss for the incumbent party in ten out of eleven cases. This corresponds to a success rate of 92% over this period.

“We are admittedly concerned about the narrower margins at which many of these forecasts prevailed,” Ramsey wrote in a recent note to clients, noting that in some cases the Dow Jones rose or fell by less than a percentage point.

It will not be clear what this indicator will predict until the close of trading on Election Day. But through Monday's close, the Dow was up 2.4% since Aug. 20, 11 weeks before Election Day.

“The downside to this market-based election rule is that one must wait until the November 5 trading deadline for final decision,” Ramsey wrote. “Fortunately, the stock market will typically decline as the election gets closer.