The US stock market is one of the best predictors of whether the ruling party will win the presidential election.
This is important to know because of the largely contradictory messages from electronic prediction markets, which many have so far turned to for reliable predictions. Many fans of these markets have recently become disillusioned by these contradictory messages. For example, a survey conducted earlier this week of some of the best-known prediction markets revealed that, depending on your focus, the probability of President Joe Biden being re-elected currently ranges from less than 38% to a high of 76%. That’s such a wide range that it’s difficult to assign much weight to any of the predictions.
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What about other economic, financial and sentiment indicators? To find out, I looked at the U.S. stock market, the economy as measured by real GDP, the Conference Board’s consumer confidence index, and the University of Michigan’s consumer sentiment survey. In each case, I focused on cumulative changes in the year from Election Day. Only one—the stock market—was significantly correlated with the probability of victory for the ruling party (at the 95% confidence level that statisticians often use to decide whether a pattern is genuine).
What I discovered is summarized in the chart below. To construct it, I separated every presidential election since the Dow Jones Industrial Average DJIA was established in 1896 into four equally sized groups based on their year-to-date return on Election Day. As you can see, the chances of the party in power keeping the White House grow in line with the year’s accumulated performance.
Based on historical correlations and the Dow’s year-to-date gain of just 5.6%, Biden’s chances of being reelected are 58.8%. These odds will increase if the stock market gains more between now and Election Day, and decrease if the market falls.
Even if electronic prediction markets didn’t send such contradictory messages, it would be difficult to show that their results are better than those of the stock market. This is because, without a large sample, it is very difficult for a pattern to meet traditional standards of statistical significance. The Iowa Electronic Markets (IEM), one of the oldest instruments, began in 1988, for example. Therefore, its track record only covers nine presidential elections.
James Carville, former President Bill Clinton’s influential strategist during the 1992 election, famously said, “It’s the economy, stupid.” He used the phrase to remind the Clinton campaign team that all other issues pale in comparison to the economy as a determining factor in whether the party in power keeps the White House. Maybe we should modify Carville’s phrase to “It’s the stock market, stupid.”
Mark Hulbert is a regular contributor to MarketWatch. Your Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be contacted at .
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