Back in January, when it still wasn't certain that Donald Trump would be the Republican presidential candidate, let alone be neck and neck with Hillary Clinton in the polls days ahead of the election, we explained why Trump should be praying for a market crash, or rather not so much a market crash as a swoon in the market in the three months prior to the election. We were referring to a market-based indicator which had a near flawless 86.4% accuracy track record.
As we noted at the time, the old saying that “people vote their pocketbooks” is more accurate than the average political analyst thinks. While Wall Street typically worries about how politics might affect the market, presidential candidates are far more concerned about how the stock market might affect their political outcomes.
Here is why this is important: historically, the market performance in the three months leading up to a Presidential Election has displayed an uncanny ability to forecast who will win the White House… the incumbent party or the challenger. Since 1928, there have been 22 Presidential Elections. In 14 of them, the S&P 500 climbed during the three months preceding election day. The incumbent President or party won in 12 of those 14 instances. However, in 7 of the 8 elections where the S&P 500 fell over that three month period, the incumbent party lost.
There are only three exceptions to this correlation: 1956, 1968, and 1980. Statistically, the market has an 86.4% success rate in forecasting the election!
As we further explained at the start of the year, "this relationship occurs because the stock market reflects the economic outlook in the weeks leading up to the election. A rising stock market indicates an improving economy, which means rising confidence and increases the chances of the incumbent party’s re-election. Therefore, your time might be better spent from August through October watching the stock market rather than the debates if you want to know who will be President for the next four years."
Fast forward to today when as noted earlier, the S&P500 has declined nine consecutive trading days, the first time it has done so since 1980. But more importantly, this is how the market has performed in the past 3 months:
The chart above, which shows that the S&P has fallen some 4.5% over the critical three month period, suggests that based on this indicator, Trump has a roughly 86% chance of winning the presidential election. Alternatively, if only looking at the eight distinct cases in which the market declined in the 3 months heading into the election, there was just one occasion in which the pattern did not hold and the incumbent party was booted out on 7 of those occasions, boosting Trump's implied odds of success even higher, to 87.5%.