The Stock Market Will Tell You the Election Winner
The intersection of politics and stocks... Short-term and long-term thinking... The 'presidential election' indicator... A good track record... Watch the next three months... The second half of the recession that never was...
This year, I (Corey McLaughlin) want to get to this idea early...
We no doubt are going to hear much more about the presidential election in the months ahead. The scene now: Donald Trump, days removed from surviving an assassination attempt, is now the betting favorite to win in November.
Meanwhile, calls for sitting President Joe Biden to drop out of seeking a second term are growing. Those began in earnest after a brutal debate performance last month and picked up just yesterday with more Democrats in Congress actually putting their names on the stance.
As we've said here recently, who actually wins the White House tends to matter less for the long-term returns of the stock market than you might think... even if one party ends up controlling the executive and legislative branches in a "sweep."
Market results have been even under a unified Democratic or Republican government since 1926. The market has returned an annual average of precisely 14.52% in 13 years of "full" Republican government and 34 years of Democratic control.
But that does not mean politics can't influence the market in the short term...
For instance, I contend that over the past few weeks, investors have been increasingly betting on a Trump win/policies. Another example that we recently covered is the "blue wave" winners that Whitney Tilson – now the lead editor of Stansberry's Investment Advisory – had recommended back in 2020.
Our colleague Dan Ferris has also written before about how elections can be "tradeable events." As Dan wrote a few years ago about the night of the 2016 election...
Futures for the benchmark S&P 500 Index melted down about 5% as it became clear Trump was winning states everybody thought Democratic nominee Hillary Clinton would win. Likewise, the Mexican peso futures melted down 10% or so (if memory serves)... since everyone knew Trump didn't like the North American Free Trade Agreement and wanted to renegotiate the agreement.
By the next morning, though, the S&P 500 losses were gone... I remember someone posting on Twitter: "Best. Crisis. Ever."
Politics tend to stoke volatility, too, which can benefit prepared investors – like those who use our Dr. David "Doc" Eifrig's favorite options-trading strategy.
And perhaps the most telling relationship between presidential elections and stocks is what the latter can tell us about the former... based on how the stock market does in the months before November in an election year.
The 'presidential election' indicator...
I can't tell you with any certainty who will win in November. However, as the calendar gets closer and closer to Election Day, I do know someone who has a good track record. He's called "Mr. Market"... specifically, the S&P 500.
Look at how stocks perform in the next few months – starting in 14 days, to be precise.
As we noted back in a September 2020 edition of the Digest (and my predecessor Justin Brill similarly wrote about four years earlier in another presidential-election cycle)...
Over the last four decades, the S&P 500's performance in the three months prior to Election Day has accurately predicted who wins in November every time. And since 1928, this indicator has been accurate more than 85% of the time.
It's true.
Here are the details...
If the S&P 500 is up from July 31 to October 31, it tends to favor the incumbent president or party that controls the White House winning again. If the U.S. benchmark index is down in the three months before November, often the incumbent president or party loses.
That definitive period kicks off in just two weeks.
Here's the historical precedent for this indicator... In the 23 presidential elections since 1928, 14 were preceded by gains in the three months prior. In 12 of those 14 instances, the incumbent (or the incumbent party) won the White House.
Conversely, in eight of the nine elections preceded by three months of stock market losses, incumbents were sent packing. This was the case in 2020, by the most razor-thin of margins. From July 31, 2020, to October 31, the S&P 500 lost a slim 0.04%.
And, perhaps appropriately, the election result was slim in Biden's favor (and contested by Trump). In any case, this indicator was again "right" about the election result, as it has been about every one since 1984.
Why? Well, as we wrote four years ago...
If we had to guess, we'd say that the forward-thinking stock market prefers the predictability of one party staying in charge of the White House, and that the sentiment is reflected in months-long stretches of positive (or negative) returns in the S&P 500 ahead of Election Day.
I still say that's the case. If investors have an inkling that certain policies might change come November, they will be adjusting expectations in the months before Election Day.
But there's also another factor to consider: whether a recession has occurred under the current president.
The recession factor...
Since 1932, an incumbent president has never failed to win reelection unless a recession has occurred during his time in office. That's also what we had in 2020, albeit briefly amid the COVID-19 panic.
This makes some sense because if voters are upset with the economy, they want change. Whether that change works or is "right" is another story. In most cases, the answer is simply "more spending."
Anyway, right now, while you don't hear much about it in the mainstream financial media, we could be on the brink of a recession. The unemployment rate has ticked up in each of the past four months. Today, weekly jobless claims hit 243,000, nearly a one-year high.
The Federal Reserve is now signaling interest-rate cuts to come because it sees the economy weakening. Central bank officials haven't said it quite that plainly, but job losses are picking up.
Of course, though, even the simple definition of "recession" has become muddied.
Back in the first half of 2022, the U.S. economy saw two straight quarters of negative GDP growth. That's a "technical" recession, though the powers that be did their best to convince everyone a recession wasn't happening because the unemployment rate was so low. But that was mainly because the COVID stimulus effect was still influencing a lot of things in the economy. So you could argue we have seen a recession in Biden's term.
Plus, the unemployment rate is now rising, but GDP growth remains positive. So, if current trends continue... we could consider this the second half of the recession that never was but was, in a sense, happening all along the way.
Either way, I suspect the stock market will tell us something soon...
I'm not so sure formal definitions matter as much as sentiment about the economy, and both might matter by November.
Firstly, if we do have a recession (and I'm not predicting it, just putting it on the table as a possibility), stocks are due for a fall yet.
As our Stansberry's Credit Opportunities editor Mike DiBiase has pointed out before, stocks tend to "bottom" during or after recessions, not before. And as Mike wrote earlier this year, most recessions have begun only after the Fed starts cutting rates.
The way things are going with the Fed's favorite data, economists won't declare an "official" recession until later this year at the earliest, if at all. But that doesn't mean stocks couldn't start a leg lower from all-time highs before then.
Today, with all of the major U.S. stock indexes down (including the small-cap Russell 2000 Index for a second straight day) and oil prices up, it's easy to say this might be afoot right now. One or two days doesn't make a trend, but we'll keep watch.
Second, if stocks have a negative return after July 31 through October 31, history suggests the challenger (Trump) will win the White House. If the S&P 500 finishes higher during that span, history says it's likely that the incumbent president (or his party, a potentially important note this year) will win again.
There will be short-term trades to be made based on these expectations, but they'll tend not to matter as much over the long run.
Because then there's this...
While reading a few things today that we wrote back in 2020 about the election, I found this, from our November 2, 2020 edition...
As we've said for the better part of this year, it doesn't matter if the winner is declared on Tuesday, Wednesday, or sometime in early 2021. Whenever it happens, our editors expect a few things to play out no matter what in the years ahead...
Namely, more government spending. It's the one thing that the two major parties agree on... Even if more spending is for different reasons (and the federal deficit has risen 435% in the last four years alone), the result and troubling effect on the value of a U.S. dollar is the same (as is the benefit for "hard" investments like gold and bitcoin).
... the folks in Washington aren't even trying to hide their feelings anymore. The future, they say, is somebody else's problem.
More spending, no matter what happens. That's still a good bet.
As Dan wrote earlier this year...
At least as far as your portfolio is concerned, neither candidate will do anything but maintain the status quo – like all those before them. No matter who the next president is, he'll borrow, tax, and spend, and the government will grow.
Thus the importance of inflation protection, be it through shares of high-quality stocks that will reward you in any economic environment, or "hard assets" like gold.
Which brings me to our quote of the week...
This is from President Harry S. Truman, himself the target of an assassination attempt back in 1950. The would-be assassins, a pair of Puerto Rican pro-independence activists, killed a White House police officer in the plot but never reached Truman.
Anyway, I was reading the 25th-anniversary update to Nick Murray's classic book, Simple Wealth, Inevitable Wealth, on long-term investing that just came out this month. Early in the book, Murray highlights a quote from Truman: "There is nothing new in the world except the history you do not know."
Frankly, I'm not sure this sentiment is entirely accurate. There are new ways that history can repeat. Truman himself was responsible for the decision to use an atomic bomb as a weapon of war for the first time, against Japan in 1945.
But the point is that history seems to rhyme enough that the past can shed light on the potential future. That goes for elections, stocks, and spending. Watch how the market performs in the months ahead for clues about who the next president will be... and protect your nest egg from inflation no matter what.
New 52-week highs (as of 7/17/24): American Express (AXP), Berkshire Hathaway (BRK-B), Colgate-Palmolive (CL), Electronic Arts (EA), Enstar (ESGR), Diamondback Energy (FANG), Intercontinental Exchange (ICE), JPMorgan Chase (JPM), Kinder Morgan (KMI), Coca-Cola (KO), Lockheed Martin (LMT), Grand Canyon Education (LOPE), Altria (MO), Novartis (NVS), Omega Healthcare Investors (OHI), Procter & Gamble (PG), Rithm Capital (RITM), Roper Technologies (ROP), SPDR S&P 600 Small Cap Value Fund (SLYV), S&P Global (SPGI), SPDR Portfolio S&P 500 Value Fund (SPYV), ProShares Ultra Financials (UYG), Waste Management (WM), Consumer Staples Select Sector SPDR Fund (XLP), and Health Care Select Sector SPDR Fund (XLV).
In today's mailbag, one thought about the "Great Rotation," the subject of yesterday's edition... What's on your mind? As always, e-mail us at feedback@stansberryresearch.com.
"The rotation would explain why my top performing share, which I bought on 25th June, was 20.41% profit [on Tuesday], but is now just 18.66% profit now... If the entire market [or sector] has dropped because of 'rotation' then it's not a problem with the specific ticker codes but is a case of 'a rising tide raises all boats' and the equivalent 'a falling tide descends all boats', where the blame here is on the tide not the boat. Until I read the mailing, I thought maybe the ticker code was at fault." – Subscriber Richard A.
All the best,
Corey McLaughlin
Baltimore, Maryland
July 18, 2024