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Headlines
- The S&P 500 has accurately predicted presidential election outcomes 83% of the time since 1928.
- The stock market's performance in the three months before an election is a key indicator.
- Positive market performance typically favors the incumbent party, while negative performance often indicates a change in leadership.
How the Stock Market Can Predict the Outcome of the Presidential Election
The stock market has proven to be a reliable indicator in predicting the outcome of presidential elections. Historical data reveals that since 1928, the S&P 500 has demonstrated an 83% accuracy rate in forecasting which political party will secure the White House.
According to Adam Turnquist, LPL's chief technical strategist, the performance of the S&P 500 in the three months leading up to election day is the most critical period to observe. Turnquist notes that when the S&P 500 experiences gains during this time frame, the incumbent party tends to retain control of the presidency 80% of the time. Conversely, if the market shows a decline, the incumbent party often loses, with an accuracy rate of 89%.
For instance, the S&P 500 fell by 24.8% in the three months before the 2008 election, resulting in the Democrats winning the presidency with Barack Obama, ending the Republicans' eight-year tenure. Similarly, a 2.3% decline in the stock market before the 2016 election coincided with Donald Trump's victory, replacing the Democrats in the White House.
However, there are exceptions to this trend. In 2020, the S&P 500 rose by 2.3% in the months preceding the election, yet the incumbent party, led by President Donald Trump, lost to Joe Biden.
Despite occasional discrepancies, the S&P 500's track record in predicting election outcomes remains noteworthy. As the current three-month window before the next election has begun with a slight market decline of 0.5%, this indicator suggests a possible advantage for the Republicans. However, with 88 days remaining until the election, market trends could still shift, altering the potential prediction.
