Morgan Stanley's Managing Director of Research Michael Zezas warned on Monday that stock markets at all-time highs and a stable economy "does not guarantee a win for the president" in November.
"The most common misconception among investors we talk to is that solid economic growth assures the president's re-election," wrote Zezas.
He said, "Betting markets have a spotty record as a poll predictor. Our take: be reactive, not proactive, and let plausible policy paths guide you."
Zezas said there are several reasons why investors shouldn't rely on the "good economy/incumbent wins" narrative:
First, he said there's not enough data of an incumbent with a stable economy but weak poll numbers:
"Even if you find this rule of thumb compelling, it is worth noting that there's a competing rule of thumb: Presidents with negative net approval ratings tend to lose their bid for re-election."
Second, Zezas suggests a good economy is vital, but not sufficient for an incumbent win:
"It is true that incumbents running with a poor economic backdrop tend to lose, but we'd be wary of concluding that this definitively means incumbents with good economies should win. First, the sample size of incumbents losing is quite small, only three. Second, one of those three incumbents included a president (Bush I) who presided over both net gains in income and decreases in unemployment, suggesting it could have been something other than the economy that also contributed to his loss. Third, the economy tends to grow, with US GDP having been positive 243 of the last 279 quarters going back to 1950. Hence, incumbents are typically running when the economy is good, making the economic variable more like a constant. Other incumbency advantages (i.e., typically not having to run in a primary, name recognition) are also near constants. Said differently, there's not sufficient evidence to conclude a good economy is more powerful than other potential variables in determining incumbency advantage. Taken together, this suggests a good economy might be a necessary condition for an incumbent to win, but we think the evidence is unconvincing that it is sufficient."
And third, he states the economy isn't as important as everyone believes:
"At the moment, voters don't appear to be particularly worried about the economy. The percentage of Americans mentioning economic issues as the nation's most important problem is at a 20-year low (13%), compared to the pre-crisis cycle low of 16%. Rather, they seem far more likely to cite concerns about leadership, immigration, and healthcare.
In addition, Americans currently seem to net trust Democrats more than Republicans on whatever they define as their most important issue [Gallup, 12/2019]. Going back to 1984, the party with this advantage has more commonly won White House control (Exhibit 4). This is yet another "rule of thumb" that contradicts the "good economy/incumbent wins" rule."
Zezas' conclusion: "The Greatest Economy Ever" and the stock market at a record high might not guarantee a victory for President Trump.