The Stock market seems to be a much more consistent indicator of election outcomes that anything else I’ve seen out there. Unemployment rates, inflation and GDP numbers just don’t seem to give us any valuable information when it comes to who will be elected President.
According to Sam Stovall of S&P Capital IQ, since 1900, incumbents have been elected 80% of the time following 3 month gains. The S&P500 is up 1.6% since August 6th. When markets fell, a new president was elected 88% of the time. On a longer-term horizon, a study going back to 1792 found that strong gains in the final three years of incumbents’ terms were associated with landslide wins. The S&p500 is up over 35% since November 2009.
The Intrade data is also calling for an Obama victory. The current numbers give Obama a 71.3% chance, up 4.5% in the most recent day of trading. And this should bode well for the S&P500, which seems to be highly correlated with Obama’s Intrade chart. We did the math last month and came to the conclusion that there isn’t a casual relationship between Obama ‘s Intrade price and the S&P 500, but rather a coincidental relationship being caused by outside factors. The positive correlation actually picks up nicely when the Intrade numbers lag the S&P500 by 5 days (see here).
There is a common misconception, from what I’ve seen, that a republican president is better for the stock market. The data actually shows the complete opposite; “Since 1900, the S&P 500 has risen a median 12.1 per cent under Democrats and 5.1 per cent under Republicans” – Sam Stovall. “Since 1929”, says Barclays, “Markets rose by 10.8 per cent annually under Democrats compared to 2.7 per cent for Republicans. CMC Markets, meanwhile, found average monthly returns over the last century were 0.73 per cent under Democrats and 0.38 per cent under Republicans.”
The best scenario for everyone has been when there is a Democrat in the White House and Republicans control Congress. In these cases, the Dow Jones Industrial Average has seen average gains of 19.5% per year. So we’ll just have to wait and see how it all plays out. But these numbers are fascinating to me and seem to suggest that Obama will be re-elected on Tuesday.