Most presidential elections are difficult to predict and the voting results often come so close, a recount must be called for. The race for the white house this year is so totally capricious a different victor emerges with each new survey reported.
Wall Street analysts have been saying for months that in order to know who will come out ahead in this year’s contest, disregard the polls and look at the stock markets. The prediction method goes like this: if stocks are higher over the three months before the vote--from August 1st through October 31st--the incumbent party wins; if stocks fall over this same period, a new party wins is ushered in.
According to several stock market experts, these critical three months have been astonishingly accurate at predicting the next president. Looking at data for every presidential election going back to 1944 (FDR v. Dewey), if stocks rose in price from July 31 to October 31, the party that currently controlled the White House won the election 82% of the time.
If stocks—those listed on the S&P 500 index that tracks the performance of 500 of America's largest companies-- were down, voters chose to kick out the party in power and replace it 86% of the time.
The S&P 500 has correctly "predicted" the winner in 19 of the past 22 presidential elections.
Economy Key Factor
The main point in this prediction is the state of the economy during those three months. If the economy is growing and people think there are good times ahead, they are likely to want to stick with the same presidential party. If they are worried and in doubt about the country’s economic future, stocks take a beating and voters opt for new leadership.
According to one analyst, election years where no incumbent is up for re-election have been tougher for stocks than presidential reelection and non-presidential election years. However in the past two occasions—both rare-- when a political party received a 3rd term, the S&P 500 rallied, increasing 30 and 27 percent respectively in the year after Harry Truman won in 1948 and George H.W. Bush won in 1988.
The only times that the stock market predictor didn't work were in years where a strong third party candidate was involved (e.g. 1968 or 1980) or when there was a surprise geopolitical jolt like 1956 when England and France seized the Suez Canal from Egypt. This third party factor could make the current election more difficult to predict too as Libertarian Gary Johnson has been polling around 10%.
It would seem then that it isn't so much that stocks "predict" the election outcome, but that stocks tend to reflect the economy's overall trend, which in turn affects voters' decision making. With the stock market currently at near all-time highs, Wall Street experts have very mixed views on whether it can go up even more.