Stocks, not polls, could predict election winner

Ignore the pundits and polls. If you want to know which candidate will win the presidential election, the stock market will let you know.

That’s right, it turns out that the Standard & Poor’s 500 index has “correctly predicted” 19 of the past 22 elections, according to data compiled by Daniel Clifton, an analyst at Strategas Research Partners who specializes in how politics impacts financial markets.

So who’s got a better shot at the White House in November? Billionaire Donald Trump? Or former first lady and secretary of State Hillary Clinton?

It all depends on how the broad U.S. stock market performs in the three months heading into the Nov. 8 presidential election.

Past history says that if stocks post positive returns in the three-month period before the vote for the White House, the incumbent party – in this case the Democrats and Clinton – almost always wins the election.

In contrast, if stocks fall in that period, the non-incumbent party is likely to retake power on Election Day and move into the White House.

“Intuitively, this makes sense,” Clifton wrote in a report. “A lower stock market reflects a down trending economy, which is not good for the incumbent party.”

If history proves true again, it means Hillary Clinton will be rooting for stocks to rally. And Trump, who has said the market could be heading for a fall, will be better off if stocks tank as Election Day approaches.

When it comes to incumbent party presidential candidates, it is all about the stock market.

In 1992, for example, Republican presidential incumbent George H. W. Bush was bested by Democrat Bill Clinton after the S&P 500 slid 1.22% in the three-month run-up to Election Day. That was the same campaign when Clinton made the quip, "It's the economy, stupid?" to his winning advantage.

Democrat Al Gore also was downed by the stock market. Gore, on the heels of Bill Clinton’s eight-year presidential run, lost to Republican George W. Bush in a nail-biter, helped in part by the stock market’s 3.2% fall in the three months heading into the election.

Republican presidential candidate John McCain suffered a similar fate in 2008 during the financial crisis when the stock market plunged more than 19% under President George W. Bush in the three months before the election, paving the way for victory for Democrat Barack Obama.

Clifton serves up another reason why a positive trending stock market leading up to Election Day is a plus for the incumbent party and a negative for the opposition party.

“The uncertainty associated with a new president could weigh on financial markets in the short-run,” he wrote.