Want to know who will win the presidential election? Stocks and the economy are usually good crystal balls.
But this year, their ability to serve as tea leaves could be thrown because of unusual circumstances: the economic fallout from the worst global pandemic in a century and one of the sharpest downturns since the Great Depression.
America has been gripped by recession since the spring and the stock market witnessed a historic 34% plunge after the pandemic battered the economy. Recessions and major market declines typically don’t bode well for incumbents like President Donald Trump, who is battling for re-election against Democratic challenger Joe Biden.
But while Biden leads in polls, the markets and economy don’t give him the clear advantage he would typically gain.
Following a coronavirus-fueled selloff in March, the S&P 500 has staged a stunning rebound to record highs in August, even as the economy remains in a recession. While many have seen their retirement balances recover with the market turnaround, the nation has recouped slightly less than half the unprecedented 22 million jobs wiped out in early spring.
So what could this mean for the 2020 election? If the stock market continues to recover between now and Election Day, that would favor Trump, experts say.
“The recent strength that we’ve seen in stocks signals that Wall Street is siding more with Trump winning re-election,” says Ryan Detrick, senior market strategist at LPL Financial, an independent broker-dealer.
Stocks as a crystal ball
Since 1928, the stock market has forecast the winner of the election 87% of the time, including every single one since 1984, according to LPL Financial.
When the S&P 500 stock index has been higher in the three months leading up to the election, the incumbent party has usually won. When stocks were lower during that period, the incumbent party typically lost.
In 2016, for instance, Hillary Clinton was favored to win the presidency, but the stock market suggested otherwise. Stocks were weak leading up to the election, with the Dow Jones industrial average lower nine consecutive days.
There have only been three exceptions. In 1956, incumbent President Dwight D. Eisenhower still won even though the stock market was down in the three months leading up to the election. In 1968, President Lyndon B. Johnson didn’t run for re-election. Democratic nominee Hubert Horatio Humphrey lost even with stocks higher. And in 1980, President Jimmy Carter, who faced a recession that year, lost even though the market was up that three-month span.
Still, the recent volatility could lead to a reversal in stock prices, experts say. September is historically the stock market’s weakest month.
“If the market were to enter into a steeper correction between now and Election Day, it would likely have to do with concerns over the pace of the economic recovery from COVID-19,” says Ed Clissold, chief U.S. strategist at Ned Davis Research.
To be sure, stock market downturns don’t always happen during recessions. But both happening at the same time are typically one of the worst events for an incumbent.
Since 1900, the incumbent party has won three times and lost eight when there was a 20% decline in the Dow in the election year, according to Ned Davis Research. The last incumbent to win when a recession and a stock-market drop of that magnitude both occurred was President Harry Truman in 1948.
Since 1952, no party has retained the White House when there was either a 20% decline in the Dow or a recession, the data shows. Both of those events have happened in 2020.
But because the 2020 recession was caused by a rare, unexpected blow to the economy, one of the biggest questions heading into the fall is whether voters will blame Trump for the downturn.
“Can Trump convince the American electorate that the coronavirus pandemic was a shock to the economy, and that he’s still the best candidate moving forward?,” asks Clissold. “How voters perceive the markets and the economy is vital.”
Recession as tea leaves
History has shown that when a recession has occurred during the two years before the election, the incumbent president has tended to lose.
The last president to lose a re-election bid was George H.W. Bush in 1992 after he faced a recession in the early 1990s and broke his “no new taxes” pledge.
The economy has predicted the winner of every presidential election going back to President Calvin Coolidge who was the last exception to the rule when he won despite a recession within two years of the election.
He inherited a downturn when President Warren Harding passed away. By the time Americans voted in November 1924, the Roaring 1920s were underway and the economy was strong again.
With less than 50 days until Election Day on Nov. 3, the race is close. The Biden-Harris ticket is currently leading in the polls. The Real Clear Politics average of major polls shows the national lead at 5.9 percentage points.
Despite the S&P 500’s rebound to all-time highs last month, investors remain concerned about the direction of the stock market, with 48% feeling bearish in recent months, up from 41% in the spring and early summer, according to a recent Retail Client Sentiment Report from Charles Schwab.
In fact, younger investors were the most likely to be gloomy, with 59% of those under 40 reporting that they feel the market is due for a significant correction, or a drop of at least 10% from a recent peak.
Still, more than half of investors (55%) plan to move their money into the stock market, taking advantage of the potential downturn, when buying shares is cheaper.
Markets have tended to do better under Democratic administrations. Since 1950, S&P 500 returns have averaged a strong 10% a year increase under Republican presidents, but a stronger 15% a year increase under Democrats over that time span, according to LPL Financial. When adjusting for inflation, the gains balanced out.
Markets don’t like uncertainty. Among investor concerns are what happens not only if Biden wins, but if Democrats regain the Senate, too. A Democratic sweep could raise the risk for more regulations and potential tax increases, some experts argue.
Higher business taxes directly impact the earnings of publicly traded companies, which may flow through to stock prices.
The Trump administration lowered the corporate tax rate from 35% to 21%, which boosted corporate profits and helped boost markets. A Biden administration may raise the statutory rate back up to 28%, but it would likely take a Democratic sweep of Congress to enact, experts say.
How are stocks under the two parties?
A split Congress historically has been better for stocks, which tend to like that one party doesn’t have too much sway. Stocks gained close to 30% in 1985, 2013 and 2019, all under a split Congress, according to LPL Financial. The average S&P 500 gain with a divided Congress was 17.2% while GDP growth averaged 2.8%.
“Elections and pandemics are very stressful for markets, but they’re generally short term risks,” says Rob Williams, vice president of financial planning at the Schwab Center for Financial Research. “For most investors, making major portfolio changes to anticipate an election outcome can be counterproductive. You’re better off sticking with a long-term plan that keeps you on the right path during periods of stress.”