What does S&P 500 tell us about election outcome?

Bloomberg came out with an interesting insight into how S&P 500 behaves in the run-up to US presidential elections and whether this year's performance can tell us something about who is going to win the White House. A three-month period preceding US presidential elections was analyzed (63 trading sessions). Researchers concluded that positive S&P 500 return during the period leading up to Election Day has favoured candidates of the incumbent party while negative return advocated for a shift towards the challenger party. While it is impossible to develop a golden rule that would always perfectly predict the election outcome, the one proposed here has a decent track record - it has correctly predicted the outcome of 20 out of 23 elections held since 1928. Moreover, the last time this rule provided a false signal was in 1980, when Republicans took over White House in spite of a 4.7% price gain registered in the 63-session period leading up to elections. What does it tell us this time? S&P 500 has gained 1% over the 3-month period leading up to November 3, signalling that Trump could be heading for re-election tonight.

However, a caution is needed with such rules. This one is based on the assumption that good stock market performance reflects good performance of the economy and, in turn, reflects optimism of the society over incumbent party's policies. Nevertheless, one should keep in mind that we are still in the midst of coronavirus pandemic and while stimulus measures pushed US indices towards pre-pandemic levels, economic output and employment levels are still lower year-to-date. Apart from that, sample size in the study (23 elections) is too small to draw far-reaching conclusions.

3-month S&P 500 return hinting at Trump re-election? Source: Bloomberg