Stocks’ Election Gauge on Verge of Settling in Trump’s Favor

A stock-market election indicator that is often ridiculed for its randomness but whose record of prescience is hard to ignore, at least completely, is about to settle in Donald Trump’s favor.

A rally into Election Day is pushing the S&P 500’s performance over the past three months into positive territory -- a comeback for the indicator which turned

negative last week. In some circles, the rebound may be seen as boding well for President Trump’s bid for re-election given that a rising market has tended to precede a victory for the sitting party 86% of the time since 1928.

As random as the three-month span looks when it comes to the market’s return and the relationship to elections, the time-honored track record is worth heeding for traders bombarded by conflicting messages on the race between Trump and Democratic candidate Joe Biden. The theory proved spot on in 2016. Amid all the polls showing Hillary Clinton’s dominant lead over Trump, the S&P 500 fell for nine straight days before the election week, cementing its three-month performance into negative territory. In the end, Trump won.

Read: Six Investors Size Up Trump’s $9 Trillion Stock Market Bull Run

Of course in a year where the pandemic and ensuing lockdowns have upended virtually every political narrative, putting faith in a market indicator comes with its share of danger. Millions of Americans have already cast their ballots, and polls show few people remain undecided before the vote.

Still, at a time when Citigroup Inc (NYSE:C).’s investor clients predict a Trump victory, while respondents in an Evercore ISI survey say they expect Biden to take over the White House, some traders might think they are better off turning to market’s collective wisdom. The S&P 500’s performance in the months leading up to the election has correctly signaled who will win 20 out of the last 23 times.

But even having a near-perfect foresight on the election doesn’t mean things are getting any easier. While Trump’s focus on lower taxes and easier regulations helped prolong the last bull market, his party’s trepidation over expanding government aids may not sit well with traders as coronavirus cases have surged, threatening the economic recovery. On the other hand, Biden’s victory could bring more fiscal stimulus, but that’s likely to be funded by higher taxes.

Peter Boockvar, chief investment officer at Bleakley Advisory Group, said that even if he knew the election results right now, he wouldn’t have a clear idea on how the markets would respond.

“If Trump wins along with the Senate, is there a lame-duck spending package or will Pelosi make them wait until next year, if it happens at all?” Boockvar noted, referring to House Speaker Nancy Pelosi. “If Biden wins with the Senate, do we rally in anticipation of a massive spending bill in Q1 or do we sell off for the next two months as people lock in 2020 capital-gains tax rates and earnings numbers get cut ahead of a possible corporate-tax rate increase in 2021?”

©2020 Bloomberg L.P.

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