The stock market's 'presidential predictor' is on cusp of delivering bad news to the Trump campaign
By William Watts
S&P 500 index close below 3,271.12 would predict victory for Biden
The stock market's late October tumble is on the verge of delivering bad news to President Donald Trump's re-election hopes.
The "Presidential Predictor," popularized by Sam Stovall, CFRA's chief investment strategist, tracks the S&P 500 index's performance from July 31 to Oct. 31. Going back to 1944, it's found that a positive move over that stretch usually corresponds to a presidential victory by the incumbent party, while a negative move signals a loss (see chart below).
The S&P 500 on Friday, the last trading day of October, was down 39.13 points, or 1.2%, at 3,270.98, taking it below the July 31 close at 3,271.12. Trading was choppy (https://www.marketwatch.com/story/dow-futures-down-over-100-points-as-big-tech-guidance-stokes-unease-over-covid-impact-11604056897), with the index falling as low as 3,240.21.
"On an intraday basis, the Presidential Predictor is now in agreement with the polls. It is obviously going to be a tight election that may take some time to be decided," Stovall said, in an email.
Polls show Democratic challenger Joe Biden leading Trump nationwide, though his advantage has narrowed in recent weeks. Biden is also seen ahead in key battleground states, though strategists see some scope for Trump to pull out an Electoral College victory, but his path appears more difficult than in 2016.
The Real Clear Politics average of national polls (https://www.realclearpolitics.com/epolls/2020/president/us/general_election_trump_vs_biden-6247.html) on Friday showed Biden with a 7.8 percentage point lead over Trump.
See:Biden, Trump hold Florida rallies hours apart, as Democrat retakes lead in crucial state's polls (https://www.marketwatch.com/story/biden-trump-hold-florida-rallies-hours-apart-as-democrat-retakes-lead-in-crucial-states-polls-2020-10-29)
Fears of a contested election outcome, in which results aren't clear for days or even weeks amid legal and political wrangling have been cited as a big worry for investors.
Related: Markets are starting to get jittery over the possibility of another divided government in Washington post-election (https://www.marketwatch.com/story/dont-count-on-a-blue-sweep-markets-are-starting-to-get-jittery-over-the-possibility-of-another-divided-government-in-washington-post-election-11603826566)
The stock-market metric doesn't have a perfect record. It failed to call the correct outcome in 1956, when Republican President Dwight Eisenhower defeated Democratic challenger Adlai Stevenson despite a 7.7% fall for the index in the three-month period.
The indicator twice failed to correctly predict defeat for the incumbent party -- in 1968, when Republican Richard Nixon defeated Democratic nominee Hubert Humphrey; and 1980, when Ronald Reagan defeated Democratic President Jimmy Carter.
All three instances in which the predictor failed were accompanied by extraordinary geopolitical factors, Stovall noted. The 1956 stock-market weakness was tied to the Suez Crisis, following Egyptian President Gamal Abdel Nasser's decision to nationalize the Suez Canal, and the Hungarian Uprising, which was crushed by Soviet troops, amplifying Cold War tensions.
The 1968 election, despite the buoyant stock market, was dominated by the Vietnam War, while the Iran hostage crisis was a key issue in the 1980 election.
This time around, the market's weakness in the run-up to the vote "is being driven by the renewed surge in COVID-19 and what it portends for future GDP/EPS growth," Stovall said, referring to gross domestic product and earnings per share.
-William Watts; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
October 30, 2020 12:52 ET (16:52 GMT)
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