Can The Stock Market Predict The Election?

Let me begin by saying this will not be a blog post on a my or anyone else political view. I view national politics as more of a sideshow of entertainment and while I do have my personal viewpoints, they are just that – personal and not something I’ll push on this blog.

With that, while we can attempt to have an a-political view, ignoring the relationship of political and the financial markets seems farsighted. History has shown us a strong connection to how the stock market performs several months before the election and the resulting conclusions that election comes to. I believe that many voters (not all) vote with their emotions and how they feel about the world going into that voting booth. One of the biggest catalysts to that emotional view is how their personal finances and economics currently are at that time and with that by extension – how the stock market is doing. It’s not that the majority of people are tied to their investment accounts but they probably know there’s some kind of connection from the economy to the market (a debate for another day!).

Ryan Detrick, CMT of LPL shared a great chart on Twitter noting the market’s performance three months leading up into the election has correctly predicted its outcome 20 of the last 23 years. When the market is up, the incumbent party has often been the victor. Most recently, in 2016 the S&P 3-month return was -2.3% and the Democrats lost the race to Donald Trump.

While the stock market may matter for the election, does the election really matter for the markets? I could make both a pro and a con argument for this but I think there’s some insights we can get into potential changes in government objectives based on who occupies the White House. Both Trump and Biden have plotted out their priorities, each being bullish or bearish for varies industries and sectors. Solita Marcelli, the American CIO at UBS Global Wealth Management shared her views on which corners of the market should benefit based on who wins in November. For example, she wrote that a Trump victory would be positive for financial tech, aerospace, the energy sector, and the financial sector. Meanwhile, a Biden win would be bullish for electric vehicles, the industrial sector, and materials sector. Is she correct in these views? I don’t know, they are simply one person/bank’s view, but I think they largely make sense and gives us something to work with.

I took Marcelli’s note and created custom Trump vs. Biden portfolios. This chart below shows the ratio of these two ‘portfolios’ as an almost real time view of on what the market’s expectation come November. This is assuming that investors will push up defense and energy stocks for instance should they expect a Trump re-election or show preference to the industrial sector if they believe Biden will be victorious.

Comparing these two ‘portfolios’ lines up pretty well with what the polling data shows. Below the Trump vs. Biden chart is a chart from Real Clear Politics of an average of several major national polls. You can see, when the Trump portfolio started to bottom out relative to the Biden portfolio in April is also when his poll numbers began to improve. Then in May Trump’s poll results began to weaken again, and in early June so did the Trump portfolio.

What’s interesting about the Trump vs. Biden portfolios today is they still are showing relative strength in Biden’s favor. Meanwhile, Trump’s average polling figures have strengthened over the last month. So are stocks right or the polls? There’s still plenty of time for us to find out but I find this a very interesting way to evaluate what the market believes will be the outcome when all the votes are cast in November.

Related: Technical Headwinds for Crude Oil

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