Can the stock market predict the outcome of the US election?

In less than two months, the most anticipated election gets underway – the US election. Now, I’m not here to throw support behind either party. Rather show you how the stock market has acted pre-and post-election.

History shows a “presidential election cycle” exists. And that the market tends to act a certain way in each of the four years in the cycle.

Here’s what past markets have predicted…

How do stocks perform in election-cycles?

Typically, stocks perform well during a president’s first year in office.  In the second year, they go through a major slump. Some believe this happens because of the uncertainty around midterm elections.

Once the midterm elections conclude, stocks again perform well as certainty returns to the markets.

Finally, the fourth year is also another solid year as we head into the next presidential election.

A similar pattern is playing out this year…

The S&P 500 Index’s average return in presidential election years has been around 11%. And stocks finished higher roughly three-quarters of the time.

Already this year, the S&P 500 is up roughly 19.7%.

You can look at the markets to predict the election winner…

Sounds counterintuitive…

But history shows the presidential candidates don’t guide the market. It’s more reliable to look at what the market is doing to see who will win the election.

Typically, if the stock market is up from 31 July to 31 October, the party that already holds the presidential position wins. When the market is down, victory more likely goes to the challenger.

It’s not a perfect predictor. But the evidence gives you an idea on how the election can turn out.

In the 23 presidential elections since 1928, 14 were preceded by gains in the three months prior. In 12 of those 14 instances, the party that holds the presidential position won the White House.

On the other hand, in eight of the nine elections preceded by three months of stock market losses, the challenger won.

This was the case in 2020, when the S&P500 fell 0.04% from 31 July to 31 October.

In short, pay attention to how the market performs over the next month and a half if you want to predict who might win in November. And from there, you might be able to pick winners based on specific policies of the winning party.