Want to know who’s going to win the US presidential election? Just follow the markets.
Throughout history, rarely has there been a better predictor of success at the ballots than the fortunes of the stock market. When the market is doing well, the likelihood of the presiding party winning re-election rises dramatically. When the market drops, the electorate punishes the incumbents, forcing them from power.
It’s remarkable how consistent this trend has been over such a long period of time. In fact, going back as far as 1928, there have only been three exceptions to this rule.
In 1956, it was popular incumbent Dwight D Eisenhower who secured a second term in office, despite a 2.6% decline in the market in the three months leading up to the election.
In 1968, it was Richard Nixon who ousted the Democrats from office, despite US markets rising 6.5%. (It is debatable, though, whether Nixon would have won had John F Kennedy lived out to see his term, putting the Democrats campaign on a stronger footing. Instead, Nixon was pitted against little known Hubert Humphrey, who had succeed Lyndon B Johnson, and duly won.)
The most recent time the result bucked the trend was in 1980, when Ronald Reagan dumped the Carter administration from the White House.
Other than those three exceptions, market swings in the lead up to an election have predicted the results accurately on 19 occasions. That’s not an anomaly. It’s a trend.
But how far should we read into this? And what can we really make of it?
Well, there’s a logic to this rule, and one that should be fairly obvious to you.
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Markets tend to rise in line with economies. Conversely, they tend to fall in times of economic hardship. At the very least, the perception of a ‘strong’ or ‘healthy’ economy is enough to boost markets. At the same time, this works the other was in equal measure. When things seem worse — even if they aren’t — people refrain from investing capital in riskier assets.
In 2008, when markets fell 19.5% in the three months leading up to the election, the Republicans lost out to the Democratic nominee Barack Obama. You’ll remember that this was during the hysteria of the financial crisis. Obama, who campaigned on ‘Hope’ and ‘Change’, need not have gone to such lengths it would seem. The market was working in his favour. And it delivered.
What this trend also suggests is that it’s important how markets fare close to an election. Not a year out, not even six months out. But just three months. And maybe even as little as a month out from an election.
Human beings, however much we like to believe we think in the long term, are anything but. Our tendency is to think in the short term. If we feel richer today, we’re likelier to be more spendthrift with our money. What’s more, we’re more inclined to attribute our sense of prosperity to presiding governments, consciously or otherwise.
Whether or not we are actually wealthier seems to matter less. The illusion of wealth and prosperity is key. And there is no better day to day indicator of that than the stock market.
When markets rise, then, we seek to re-elect incumbent presidents. When they fall, we look to punish them. Not surprisingly, this rule doesn’t apply strictly to the US.
Look at what happened in the Australian election. The ASX rose almost 200 points in the two weeks prior to the 2 July vote. What’s more, in the three months prior to the election, the ASX had risen 350 points. That’s a rise of roughly 6%. Even if it lost seats, the Coalition retained enough to form a government. Had the January market jitters taken place in June, it may have been a different story.
Is all this coincidental? Perhaps; but as far as predictors go, you may not find a better one when it comes to elections.
But the Aussie election has passed us. Of more immediate interest to us is the US election slated for 8 November.
Next Monday will mark exactly three months out from the highly-anticipated election. Which means: If you want to get a good idea for whether Trump or Clinton will win, you need to follow the markets.
The fate of the Dow Jones and NASDAQ could very well indicate the outcome of yet another election in advance.
Specifically, if US markets suffer a drop over the next three months, you could regard Trump as a favourite to take office, if history is any guide. If the market jumps higher — or at the very least remains stable — it might be Hillary’s for the taking.
Of course, the Federal Reserve will have a big say in what happens between now and 8 November. Should the Fed raise rates at any point, it would send markets in a tailspin.
That’s not likely to happen, as there’s no indication an imminent rate hike is on the cards anytime soon. But it is curious that Trump has come out this week urging people to get out of stocks. Yesterday he warned investors that ‘very scary scenarios’ face them. Quirk of timing, or deliberate baiting?
It seems that Trump is aware of the strong relationship between market performance and election outcomes.
Hillary, meanwhile, will be hoping no nasty surprises spring up in the next three months. If the elections take place against the backdrop of economic uncertainty, Trump could benefit from any subsequent insecurity that grips the market.
Come 8 November, we’ll find out if this historically-accurate predictor adds another notch to its belt. My bet is that it will. Until then, follow the markets.
Contributor, The Daily Reckoning
PS: What we’re seeing playing out across global markets today is more than just a correction. The Daily Reckoning’s Vern Gowdie says we’re at the beginning of the next crisis.
Vern is the Founder of The Gowdie Letter and Gowdie Family Wealth advisory services. As one of Australia’s top financial planners, Vern says the next crisis is already in motion.
He warns that stocks won’t be the only market that crashes when things blow up. There’s another multibillion dollar market that’s poised to collapse when the credit bubble pops.
Australia has gone through two credit bubbles in its history. The third, and latest, has built up over the past 65 years. When it pops, the impact will leave a lasting mark on the global economy. One that makes the 2008 financial crisis look like child’s play.
The fallout of this crash could damage your wealth. But you can safeguard your wealth from the worst effects of the coming crisis if you take action.
Vern will show you how to do this, and more, in his brand new report, ‘Global Financial Crisis 2016: 3 Crisis Scenarios, and How They’ll Impact Australia’. To get your free copy today, click here.