(Source: DonkeyHotey)
The short answer ... Yes. It really can.
Now let me explain...
Recently I was listening to a podcast, though I can't for the life of me remember which one it was… maybe it was The Investors Podcast, or InvestTalk… either way check those ones out...
Anyways, I was saying… I was listening to the mystery podcast, and the speaker mentioned that the market has could predict the next president with something like an 82% accuracy. So, I decided to do some digging. Here's what I found…
Guidelines for predicting the President
If the stock market is higher November 1st than it was on July 31st, the president will be Hillary Clinton. If the stock market is lower, and stays down during that time frame, the president will be Donald Trump. Crazy, right?
Well, apparently, it's been accurate 82% of the time. When the stock market went up during that time frame, the same political party stayed in power. When the stock market went down, the political party was replaced.
This was measured over the last 72 years! (since 1944) that's the time frame a guy named Sam Stovall, an expert at S&P Global Market Intelligence, looked at to test the theory.
If the market was lower (using the S&P 500) during that time frame, the results were even more accurate, garnering an impressive 86% accuracy.
Note: I’m going to use the SPDR index (Ticker: SPY) which mirrors the S&P 500 but trades at 1/10 the price.
How this works
Basically this follows the idea that if everyone is satisfied with how things are currently going in the US; the economy is in good shape, people aren’t looking for any change, the market will continue to go up during that period.
And if the opposite is true i.e. People aren’t happy with the current administration, are looking for change, and the economy isn't humming along, the market will likely fall.
Here's what it looked like during the time frame when Obama was about to be re-elected, from July 31st to November 1st.
Now remember the rules:
a. For the president to be re-elected, or for the same party to win, the stock market must go up from July 31st to November 1st.
b. For a new political party, or new president to be elected, the stock must go down from July 31st.
What we see above is that the stock market did in fact move up from that period, and low and behold, Obama was re-elected.
For those curious, the market closed at 137.82 on July 31st and on November first, it closed at 142.83. So, the market moved up 5.01 points during that period.
You can also draw the conclusion that Obama was almost a sure thing, with the market only once dipping below that 137.82 price.
Pretty neat.
Now let’s look at when the republicans were the political party in power, and Obama was running against John McCain. You do remember what happened in that election, right?
Well here’s a quick reminder, just in case.
The democratic party won over the republicans (i.e. Obama over McCain). This means the graph should show a decrease in the timeframe discussed (again, July 31st to November 1st). Let’s check it out:
Looks like the market priced in the change, (mind you this was 2008) it moved from 126.83 down to 97.11, making it obvious that the market wanted a change and was predicting the democrats to win the next election.
Remember this predictor hasn’t always been accurate. So, we should now ask ourselves…
When was the market wrong and why?
The stock market has only been wrong three times since 1944. Those three times have been attributed to two catalysts:
1. A strong third party leader.
2. Unexpected and powerful geopolitical turmoil.
Strong third party
There were two times in history since 1944 that the third-party vote was strong enough to throw off the predictability based on the market results. This happened first in 1968, then again in 1980.
In 1968 the independent party, lead by George Wallace, controlled roughly 15-20% of the popular vote during the months of August to November. This probably caused the market to be unsure of the results, and thus be wrong in its prediction.
(This was the Nixon/Humphrey presidential race for those who are curious).
The next time the stock market was wrong was in 1980. John B. Anders of the independent party controlled anywhere from 7-24% of the popular vote, which could have caused the market to be unsure of the results, and ultimately wrong. (This year was Reagan/Carter election campaign).
Is the third party strong enough now to disrupt the market?
No, the Third place is held by Gary Johnson of the libertarian party. He currently holds about 6% of the popular vote. His vote percentage averages well below 10%, which to me, doesn't seem like enough votes to throw off this method. I’m thinking above 10% seems to be a better marker.
Geopolitical turmoil
The other time the market predicted the president incorrectly was in 1956, during the Eisenhower/Stevenson campaign. The turmoil at the time was due to the fact that England and France seized the Suez Canal from Egypt, leading to economic uncertainty. This caused the market to tumble, which led to an incorrect prediction of a presidential replacement. As you may remember from history class, Eisenhower ended up winning his re-election campaign.
Is there enough turmoil in the world now?
I'd say no. The stock market has been plugging along, moving mostly sideways over the past few months, showing little to no concern over the events happening around the world.
So, will it be right this time?
With the outliers ruled out, I think we can say that the stock market should accurately predict the next president.
Where the Market is today
Again, the period we're looking at is from July 31 - November 1st.
Here's what it looks like as of October 21st.
As you can probably see… the market closed at 216.94 on August 1st (I used that date because July 31st was a Sunday). If we look at the close today of 213.89, the market is still quite a bit lower than it was on Aug. 1st. That puts the market below that Aug 1st price point by 3.05 points. A move of 3.05 points could easily happen in a single day, so it’s not as though we're out of time, but we'll just have to wait and see what it does.
What this tells me
Like me, I'd say the market is still relatively unsure about who will be the next president. I tend to think that Clinton will win, but if we stipulate that anything above 216.94 and the market is saying Clinton, and anything below 216.94 says Trump, we get a different picture.
As you can see, the market was saying Hillary would win up until September 8th. Something spooked the market on September 9th and sent it down below that 216 mark. I wasn't sure what happened, so I looked up 'What happened on September 9, 2016'. The first article to show up was that ‘North Korea successfully tested a nuclear weapon’. Yup, that’d do it. This caused the market to tumble from a Hillary voted in market of 218.51, to a more Donald voted in Market of 213.96 and it hasn't recovered much since. (so maybe too much Geopolitical turmoil isn’t out of the question).
So now what?
Well, I know I will be keeping my eye (both maybe?) on the market.
What do we have left for time? Not much… only 6 days left for the market to decide.
I'm very curious to see if this method proves to be accurate.
Currently the opinion polls show Hillary in the lead by 6 points, (45.2 for Clinton and 39.2 for Trump) but only time will tell.
I know the correlation between the market and the electoral results are quite good, but remember, the market doesn't have a crystal ball. We'll just have to wait and see what happens, both with the stock market, and with the election. Either way, 2017 is shaping up to be an interesting year.
Let me know what you think with a comment below.
Thanks for reading!
~Ryan Chudyk~
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