The Stock Market is Telling Us Who the Next President Will Be

The economy and the stock market have already voted for the next president
Provided by MarketWatch

New Hampshire’s primary results are a sideshow compared to the most important political poll of all, the stock market.

Which is ironic, since — in contrast to the presidential campaign so far, which has confused matters more than clarified — the stock market is voting loudly and clearly: The Republicans are likely to regain control of the White House this November.

It’s easy to overlook the outsized influence that the stock market has on presidential politics, since its message doesn’t change on a day-by-day basis, or even week-to-week. Accordingly, it doesn’t fit into the daily news cycle that dominates the media’s attention. That’s why most political commentators rarely mention the stock market or the economy — and focus instead on such earth-shattering topics as the latest “Trumpertantrum” or on which computer server a few emails were sent over a decade ago.

So remember the words of James Carville, Bill Clinton’s campaign strategist in 1992, about what really determines presidential elections: “It’s the economy, stupid.”

Contrast the stock market’s performance in those years in which the incumbent political party retains the White House with how it does when the incumbent party loses. As you can see from the chart below, a strong stock market is correlated with the incumbent party winning. A declining stock market is associated with a change of parties at 1600 Pennsylvania Avenue.

Of course, as statisticians constantly remind us, correlation is not causation. Furthermore, it’s important to emphasize that the results plotted in the above chart are only barely statistically significant, so they should be interpreted as being more suggestive than conclusive. (The absence of strong statistical significance is in large part due to the small sample: There have been just 18 U.S. presidential elections since 1900 in which the incumbent party won, and 11 in which there was a change.)

One silver lining for the Democrats is that the stock market has wasted little time in producing such awful election year performance — with the S&P 500  down almost 10% in just six weeks and the NASDAQ Composite down 15%.

Contrast this year with 2008, for example: Though the stock market in that year wasn’t a stellar performer over the first half of that year, it wasn’t until September and October that the bottom dropped out. That was just a few short weeks before the November election — in which, needless to say, the incumbent party lost.

If my hunch is right, then look for significant new stimulus programs to be announced in coming weeks. For example, the Federal Reserve might not only reverse its interest rate hike decision from last December, but announce a new program of quantitative easing.

It was just such stimulus that stopped the 2011 bear market in its tracks. That major decline began on Apr. 29 of that year, and by mid September the S&P 500 was already down some 17%. On Sep. 21, the Fed announced its so-called “Operation Twist” program, in which it would lengthen the average maturity of its Treasury portfolio away from shorter-term securities to longer-term bonds. The 2011 bear market ended just eight trading sessions later, on Oct. 4.

I wouldn’t be surprised to see something similar in coming weeks.

Written by Mark Hulbert of MarketWatch

(Source: MSN)

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