By Ian Salisbury
Election Day has finally arrived, and polling suggests the race to the White House is a toss-up between Vice President Kamala Harris and former President Donald Trump. While no one knows who will win, stock market history suggests Harris may have an edge.
A recent report from stock market researcher Leuthold Group suggests recent returns for the Dow Jones Industrial Average point to a strong showing for the Democrat.
A longstanding rule of thumb suggests that, if stocks are up in the three months before Election Day, the incumbent party usually wins. The method, using the S&P 500 as a measure of the stock market, correctly predicted the outcome in 20 of the past 24 presidential elections going back to 1928, according to Leuthold Group. The S&P 500 has gained 7.3% over the past three months.
The firm decided to adjust the methodology to see if it could find a better predictor. Leuthold looked at the performance of the Dow, rather than the S&P 500, over the 11 weeks leading up to Election Day rather than 12. The result? Leuthold's number crunching found that the Dow correctly predicted the result in 22 of the past 24 elections. In other words, this method picked the winner 92% of the time, missing only Dwight Eisenhower's 1956 reelection and Richard Nixon's 1968 victory over Hubert Humphrey at the height of the Vietnam War.
While these stats may be tantalizing, there are drawbacks. First, since both methods rely on stock market returns through Election Day itself, the stock-market jury will be officially out a few hours before East Coast polls start to close Tuesday. That said, the Dow was up 5.1% from the start of Leuthold's key 11-week window starting Aug. 13 through Monday. On Tuesday, the benchmark had gained another 0.8% by midday -- suggesting that, apart from some kind of earth-shattering event, the indicator will end up favoring Harris.
In addition , while it is easy to see how the state of the stock market might affect voters' moods, it is hard not to get the impression that an 11-week window is the result of cherry-picking data. For its part, Leuthold admitted as much, calling its refinement of the S&P 500's three-month rule an "unapologetic curve-fitting exercise" it did in part "for fun."
All the same, Leuthold does seem to be on to something. The Dow hit a record high on Oct. 18, helped by an economy that's remained strong despite relatively high interest rates. Harris has maintained a small but consistent lead in the polls. And recent polls suggest she is making inroads with some voters on the economy -- which has long been a strong talking point for Trump.
Voters could also take a look at the same stock market numbers and reach a different conclusion. Only about 58% of U.S. families own stocks, according to the Pew Research Center. What most voters ultimately care about isn't the stock market but the economy. While the stock market is usually a good proxy for the economy's overall health, pundits have been talking for months about a disconnect between the market's performance and consumer sentiment.
Then there is everything else going on -- from foreign wars to immigration to the candidates themselves -- that could eclipse the stock market in voters' minds. While Harris is a member of the incumbent party, she's currently not serving as president.
To that end, it is difficult to ignore the last time the Dow's returns failed to predict the outcome of the presidential election. The 1968 election featured a deeply divided electorate, a president who dropped out after deciding he couldn't win, and a vice president striving to take his place.
Studying market returns provides one more piece of data for anyone handicapping the coming election. But -- whatever the Dow says -- it is still very much anyone's race to win.
Write to Ian Salisbury at ian.salisbury@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 05, 2024 14:16 ET (19:16 GMT)
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