The presidential election is just two days away and the stock market has locked-in its prediction, according to one indicator.
The S&P 500 (SPX) fell 0.04% between July 31 and October 31. That means the market forecasts – by a hair – that Joe Biden will win, according to CFRA Research’s Presidential Predictor.
The stock market has a fairly reliable track record: Since World War II, when the S&P 500 fell in the three months leading up to the November vote during a presidential election year, the incumbent president or party of the outgoing president has lost the election 88% of the time.
Similarly, when the S&P 500 rises during that period, the incumbent or party of the outgoing president has won 82% of the time.
The stock market had been predicting a Trump victory until Friday, when the S&P 500 tumbled 1.2%. That was just enough to send stocks negative over the past three months, giving the razor-thin edge to Biden.
“This year, the Predictor closed ever so slightly in the red during this three-month period, implying, but not guaranteeing, that Biden will emerge victorious,” said Sam Stoval, CFRA’s chief investment strategist.
Betting on a blue wave
The Presidential Predictor matches Wall Street’s forecasts. Goldman Sachs analysts predict a “blue wave,” in which Democrats will retake the White House and Senate and maintain control of the House of Representatives. Goldman believes that could be a positive outcome for markets.
“Such a blue wave would likely prompt us to upgrade our forecasts,” Goldman Sachs chief economist Jan Hatzius wrote in a report last month.
Goldman Sachs (GS) wrote that a blue wave would “sharply raise the probability” of a fiscal stimulus package of at least $2 trillion shortly after the January 20 inauguration. The firm also cited Biden’s longer-term spending plans on infrastructure, climate, health care and education.
Taken together, this spending “would at least match the likely longer-term tax increases on corporations and upper-income earnings,” Goldman Sachs wrote.
Similarly, JPMorgan strategists led by Dubravko Lakos-Bujas noted in July: “The consensus view is that a Democrat victory in November will be a negative for equities. However, we see this outcome as neutral to slightly positive.”
President Donald Trump has repeatedly predicted Democrats would decimate the American economy, and the stock market would crumble if they win in November.
But Moody’s Analytics found that Biden’s economic proposals, if enacted, would create 7.4 million more jobs than would Trump’s. The economy would return to full employment in the second half of 2022, nearly two years earlier than under Trump’s plan, Moody’s said.
A survey of CEOs conducted by the Yale School of Management in late September found that 77% of participants would vote for Biden. More than 60% predicted he would win. However a UBS survey of 500 business owners and 1,000 investors conducted in mid-October found that 55% of business owners wanted Trump to win, while 51% of investors were backing Biden.
Predicting the outcome
CNN polling shows Biden with a sizable head-to-head nationwide lead as of October 28, and within striking distance of the 270 electoral votes needed to claim victory.
No incumbent has ever won a second term when there has been a recession in the two years leading up to the election, according to data from RiverFront Investment Group.
The CFRA Presidential Predictor’s only incorrect forecast when the market fell in the three months leading up to an election was in 1956, when incumbent President Dwight Eisenhower defeated Adlai Stevenson despite a 7.7% stock market decline during the Suez Crisis and the Hungarian Uprising.
It’s not clear what, if anything, that outlier could mean for Trump. The market is down over the past three months in large part because of a surge in coronavirus cases. Trump’s handling of the pandemic is largely unpopular, although some could also view the wave of Covid-19 infections as out of his control. Trump still scores relatively high among voters for his economic record despite the recession.
