Can Stocks Predict Another Election Outcome?

The road to 1600 Pennsylvania Avenue is always filled with twists and turns, but the rollercoaster of this election year is unprecedented. A disappointing debate from President Biden drove his re-election bid into an early exit; former President Trump suffered an assassination attempt, and Vice President Kamala Harris emerged as the only official candidate seeking the Democratic presidential nomination. The recent shakeup inside the Beltway created a tighter election race and sharply reduced the probability of a Republican sweep in Congress. According to Polymarket data, betting odds for Republicans to win the House and Senate this year have dropped from 55% to 35% over the last two weeks.

While most polls point to former President Trump eking out a victory in November, election drama in India, France, and the U.K. this year serves as a fresh reminder that anything can happen on Election Day. Polling data and opinions can also vary significantly between now and November. According to a study from polling pro 538, the expected change in presidential candidate vote margin in state polling is 8.4% when Election Day is 95 days away (current count as of August 1). The expected change in vote margin does continue to decline into November but is still around 5% 30 days from Election Day.   

While polls, betting odds, and forecasts can provide valuable insights into potential election outcomes, the data can be noisy. To avoid some of that noise and potential biases, keep an eye on how the market performs during the three-month period before Election Day — a period that officially starts on Monday, August 5. Why does this three-month window matter? Since 1928, whenever the S&P 500 was positive during the three months leading up to an election, the incumbent party remained in control of the White House 80% of the time (12 of 15 elections). In contrast, when the market was lower during the three months before an election, the incumbent party lost the election eight of the last nine times. When combined, market performance has “predicted” 20 of the last 24 elections. 

Stocks Have an Impressive Track Record of Predicting Elections

S&P 500 Index Returns Three Months Before the Presidential Election

Source: LPL Research, FactSet 08/01/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90. 

Seasonality Cools in August 

With July officially in the rearview mirror, stock market seasonality tends to cool off in August. Since 1990, the S&P 500 has posted an average decline of 0.6% and only finished higher 51% of the time, marking the second-lowest positivity rate across the calendar (September is the lowest at 47%). When the S&P 500 is positive in August, the average return has been 2.6%, as opposed to the average decline of 4.1%. 

At the sector level, real estate, technology, and utilities outperformed in August, with average gains of around 0.2%–0.3%. Communication services, energy, and materials have historically underperformed during the month, with average losses of around 1.3%–1.5% (though keep in mind Meta (META) and Alphabet (GOOG/L) were added to communication services in 2018, dramatically changing the makeup of the sector).   

Average August S&P 500 Sector Returns (1990–2023)

Source: LPL Research, Bloomberg 08/01/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. All index and sector data incorporates average monthly returns since 1990, excluding real estate, which is based on data going back to 2002. 

Summary 

The S&P 500 extended its three-month winning streak with a 1.2% gain in July, bringing its year-to-date return to 16.7%. The market's strong momentum now faces a weak seasonal stretch, with August and September historically down months. Volatility could also ramp up based on the historical progression of the CBOE Volatility Index, which tends to peak in late September/early October. Investors should also keep an eye on how stocks perform from now to Election Day, as performance during this three-month period has an impressive track record of predicting election outcomes (a positive return points to an incumbent party win, and vice versa).