Can the Stock Market Predict a Trump Victory?

How unique is Donald Trump?  Trump’s supporters are impressed by his politically incorrect manners, and his opponents are annoyed.  His supporters are attracted by his achievements and deeds, and his opponents do not like his words.  The vast majority of people worldwide agree that Trump is a unique political figure in spite of any misgivings about him.

Ryan Detrick of LPL Financial has published a study that analyzed the potential political implications of movements in the stock market.  The results were stunning.  It turns out that some stock market indices — such as the S&P 500 — can predict the presidential election outcome.

The S&P 500 index’s behavior in the three months before the election predicted 87% of election results from 1928 to 2016.  The reliability of forecasts since 1984 is absolutely unique — 100%.  If the S&P 500 index rises three months before the presidential election, then the candidate who belongs to the incumbent party wins.  If the index suffers losses in this three-month interval, the party in power will lose, and the White House will fall into the opposition’s hands.

To illustrate, we present the S&P 500 index charts in a three-month interval (from early August to early November) for the 2000–2020 elections.

Fig.  1.  Elections of 2000.  The market fell 2%, and the incumbent party (Gore) lost.

Fig.  2.  Elections of 2004.  The market grew 9%, and the incumbent party (Bush) won.

Fig.  3.  Elections of 2008.  The market fell 30%, and the incumbent party (McCain) lost.

Fig.  4.  Elections of 2012.  The market grew 2%, and the incumbent party (Obama) won.

Fig.  5.  Elections of 2016.  The market fell 2%, and the incumbent party (Clinton) lost.

Why does this seem to hold true?  In addition to the adage “people vote with their wallet,” the explanation for this phenomenon is based on the fact that stock indices in America have long been the object of government policy.  This was not always the case.  Many years ago, indices like the S&P 500 were an accurate measure of the expectations of the state of the economy (usually six months in advance).  Since the mid-’80s, indices like the S&P 500 reflect mainly the level of market liquidity — that is, the level of immediate cash for assets without affecting wide swings in values.

Although it does not directly influence the economy, this happened because Washington possesses a unique instrument of power: the level of liquidity.  The federal government has the ability to open and close the faucet for issuing money, and since the mid-1980s, this has become one of the main political levers for market manipulation.  Sometimes this is done successfully, and then there is a successful transfer of the baton from one representative of the incumbent party to another.  But sometimes failure occurs, and the White House passes into the hands of the opposition.

The dollar now dominates a market that was once free.  Washington controls the dollar’s liquidity and thus can step on the gas pedal or the brake pedal.  If Washington adds trillions of dollars of liquidity to the system, then the dollar falls.  As a result, money is transferred to assets that generally benefit from the dollar’s fall — stocks, gold, and real estate.  This process is reflected in the famous quip of Bill Clinton’s 1992 campaign strategist James Carville: “It’s the economy, stupid.”

In this sense, Donald Trump is not unique.  He did not develop these rules of the game, but he is forced to play by these rules.  Following the rules, President Trump must stimulate the economy to win re-election, and the Democrats are trying to torpedo all his attempts to do so.  That is why negotiations with Nancy Pelosi are at an impasse.

An illustration of current political and financial tug-of-war is shown in Fig. 6:

Fig: 6.  Elections of 2020.  By mid-October of 2020, the market predicts Trump’s victory.  The current version of this chart.

Could the market drop low enough in the weeks leading up to the election for Biden to get any chance of winning?  Of course, the market may fall.  But such a colossus as the American stock market will require a catalyst as extraordinary as the 2007–08 financial crisis or the coronavirus crisis.  It is unlikely that the Democrats have enough political ammunition available to influence the entire stock market and conjure even a glimmer of hope for the sleepy Joe Biden.

An additional consequence of these results is that opinion polls, which do not reflect the stock market dynamics at least qualitatively, cannot be trusted.  Such opinion polls are designed to shape public opinion instead of reflecting it.

The situation with the stock market in an election year is quite ordinary.  Therefore, one should not insist on Trump’s uncommonness in these ordinary circumstances.  Donald Trump is doing what he should be doing.  However, for the prediction to come true, his supporters must do what they must do – not sit at home, but take part in the voting on November 3, 2020.

[Originally published at American Thinker]

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