The S&P 500’s direction in the last three months leading up to an election has correctly predicted 20 of the past 23 elections and this year’s direction is signaling a Trump victory.
According to Ryan Detrick, market strategist at LPL Financial, when the S&P 500 is up in the three months before an election, the incumbent typically wins and when the S&P 5600 is down, the challenger typically wins. Investors Business Daily (IBD) reports the S&P 500 is trending upwards, signaling a Trump win, but barely.
The S&P 500’s 1.2% last-minute gain Monday put it at 3310.24, meaning based on the model, President Trump wins, barely. According to Detrick, the S&P 500’s total return, including dividends, in the last three months is just 0.5%.
“Historically, the stock market is a great predictor of who will be in the White House,” Detrick told IBD. “Remember 2016 when nearly everyone thought former Secretary of State Hillary Clinton would win? Well, stocks didn’t buy it, as the S&P 500 fell ahead of the election and signaled a change in party.”
Although the model typically predicts the next president, this year could be different. For starters, the three month change was microscopic and even in the negative until the final hours of trading Monday. Secondly, contributions from those in the securities and investment industry have given more money to Democratic presidential candidate Joe Biden than to President Trump, despite the fact the market grew in the first three years of Trump’s presidency.
Also, the coronavirus pandemic created the one thing Wall Street hates, unpredictability. Since the coronavirus hit the U.S. in February, President Trump largely ignored it, which ended up causing significant market instability down the road.
The market has been largely unstable during the spring and summer with significant growth at times and falls so low that three emergency stoppages of the market were implemented in March. Additionally, the IBD predicted a narrow Biden win as late as Monday.
According to IBD, the election is expected to be so close, the prediction changes depending on what time period of the year one uses for the S&P 500’s three-month test.
Sam Stovall, chief investment strategist at CFRA, told IBD a different S&P 500 formula that’s been 82% to 88% accurate predicts a Biden victory. That model tracks the S&P 500’s return from July 31 to Oct. 31.
Stovall told IBD a weak period in those three months leading into election is bad for the incumbent and the S&P dropped 0.6% during that time in 2020.
With 100 million voters participating in the election before Election Day, who will win is just as unpredictable as the market has been all year.