Stock market returns have historically been good predictors of presidential election outcomes.
Below chart illustrates the predictive power of the S&P 500 historical performance before election day.
The data presented indicates a strong correlation between stock market returns and the outcomes of U.S. presidential elections.
By analyzing the performance of the stock market leading up to the elections, it is possible to calculate the probability of the incumbent party winning or losing based on whether the market returns were positive or negative during the period.
The “hit rate” of predicting election results based on the sign of the stock market return from one year to one month before the elections exceeded 50%.
This predictive accuracy was even higher when looking at the returns three months prior to the elections, with a probability of over 85% in accurately forecasting the election outcome.
Specifically, a positive three-month return suggested a victory for the incumbent party (85% of the time), while a negative return indicated a higher likelihood of the incumbent party losing the election (88% of the time).
Based on the analysis conducted, it is evident that there are correlations between stock market returns and U.S. presidential election outcomes, primarily attributed to their shared dependence on the state of the economy. As famously emphasized by presidential adviser James Carville in 1992, “It’s the economy, stupid.”
Drawing from this analysis, the conclusion is that the 2024 presidential election is not expected to deviate significantly from historical trends based on the relationship between stock market performance, economic conditions, and election outcomes.
