Why Trump Should Be Worried About What the Stock Market Says

New York
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 latest fluctuations in the prediction markets and dramatic shifts in the share price of former President Donald Trump’s social media company, there is a far simpler prediction with a surprisingly strong track record.

It finds that the party in the White House tends to stay in power when the US stock market rises ahead of 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 advanced between late July and Halloween, according to CFRA Research’s Sam Stovall, who came up with this election forecast.

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

Therefore, Trump, who follows the stock market closely and obsesses over it as president, should be nervous about the latest trend on Wall Street.

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

“If the market goes up, the established party typically wins. If the market goes down, the incumbent will be replaced, Stovall told CNN in a phone interview Monday.

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

Still, there is a certain logic to it all.

If the markets rise ahead of the election, it means that investors are not worried about an impending recession. And a recession would be a reason for voters to throw out the party in power.

“The market is an anticipator. If the market is down, it’s because investors expect higher interest rates or a recession — both of which would negatively affect voters,” Stovall said.

That’s what happened in 2008.

The S&P 500 plunged nearly 24% between late July and late October of that year, a period that 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 looming, voters decided it was time for a change. The Republicans were voted out of the White House in favor of the Democrat Barack Obama.

The market indicator was right in 2016 and 2020

Vice President Kamala Harris should be relieved that the market has seen solid gains.

When the S&P 500 declines between late July and late October, the incumbent has been replaced 89% of the time, according to Stovall. The only misread was in 1956 when Dwight Eisenhower defeated Adlai Stevenson.

This indicator was also correct about the previous two Trump races.

In 2016, the S&P 500 fell 2.2% in the run-up to Trump’s matchup with Democratic nominee Hillary Clinton. Clinton, who served as secretary of state in the Obama administration, lost to Trump despite wide leads in most polls in October.

And in 2020, the S&P 500 fell (just 0.04%) in the final months before the election. Trump ended up losing to Joe Biden.

It’s worth noting that this stock market prediction has also been wrong in the past.

In 1968, an election year that bore some important similarities to 2024, the S&P 500 rose nearly 6% in the final months before the election. And yet Hubert Humphrey, the incumbent Democratic nominee, ended up losing to Richard Nixon.

Stovall notes that, like this year, the 1968 Democratic convention was held in Chicago, and like Harris, Humphrey was an incumbent vice president who was nominated after the incumbent president suspended their campaign. Likewise, voters in 1968 were frustrated with the establishment.

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

In 1980, Jimmy Carter lost his re-election bid, even though the market was solidly higher in the months leading up to the election. Carter was hurt by high inflation and the hostage crisis in Iran.

This year’s boom before the election is historic.

The S&P 500 ended October up 19.6% for the year. That is the best performance for an election year through October since 1936, according to Bespoke Investment Group.

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

Part of that has to do with optimism over a likely soft landing for the US economy and the Federal Reserve’s decision to aggressively cut interest rates. Investors are still fired up about AI boom that sent tech stocks soaring. And some market strategists have pointed to hopes that Trump will win the White House by enacting tax cuts that would help corporate profits.

Still, there is another market indicator that gives reason for hope to the Harris camp.

It finds that a gain for the Dow Jones Industrial Average during the 11-week period before Election Day “correctly predicted” an incumbent victory in 12 of the 13 cases since 1928, according to Doug Ramsey, chief investment officer at The Leuthold Group. And a fall in the Dow accurately predicted a loss by the incumbent 10 out of 11 times. This equates to a success rate of 92% over that time period.

“We are admittedly troubled by the smaller margins by which many of these forecasts prevailed,” Ramsey wrote in a recent note to clients, noting that in some cases the Dow was up or down by less than a percentage point.

It will not be clear what this indicator will predict until trading closes on Election Day. But through Monday’s close, the Dow is up 2.4% since Aug. 20, which is 11 weeks after Election Day.

“The disadvantage of this market-based election rule is that one must wait until the close of trading on November 5 for its final decree,” Ramsey wrote. “Fortunately, the stock market will usually tip its hand when the election approaches.