The Surprising Correlation Between Stock Prices and Election Outcomes

As the nation gears up for another high-stakes presidential election, the focus has shifted to the reliability of election polls. However, a closer look at historical data suggests that the stock market may be a more accurate predictor of election outcomes than traditional polling methods.

Uncovering the Surprising Link Between Stocks and Elections

The Unpredictable Nature of Election Polls

While election polls have long been a staple of the political landscape, their accuracy has been called into question in recent years. A 2023 examination of hundreds of U.S. election polls dating back to 1998 found that pollsters accurately predicted the winner only 78% of the time, and in 2022, they predicted just 72% of the races. This inconsistency has led many to question the reliability of these surveys as a true indicator of voter sentiment.

The Surprising Accuracy of the Stock Market

In contrast, the performance of the S&P 500 between August and October has accurately predicted the winner of every presidential election since 1984. When the blue-chip index rises during this period, the incumbent party has won every time, but when the S&P 500 has fallen, it has signaled an impending victory for the challenger. This correlation suggests that the stock market may be a more reliable indicator of broader economic sentiment and voter preferences than traditional polling methods.

Explaining the Link Between Stocks and Elections

Comerica Bank's chief investment officer John Lynch and senior analyst Matthew Anderson offer a simple explanation for this correlation. They argue that "Equity performance reflects broader economic sentiment." When voters are satisfied with the economy's direction, they tend to support the status quo, but when they are dissatisfied, they are more inclined to vote for change. This suggests that the stock market's performance may be a more accurate reflection of the electorate's mood than the often-conflicting results of election polls.

The Misery Index: Another Reliable Predictor?

In addition to the stock market's predictive power, the Misery Index, which combines the seasonally adjusted unemployment rate and the annual inflation rate, has also accurately predicted every presidential election since 1980. When the Misery Index decreases between August and October, the incumbent party has won, but when it increases, the challenger has prevailed.The latest Misery Index reading of 6.73% in August, down from a peak of 12.66% in July 2022, suggests that the Democrats may have a slight advantage heading into the election. However, the unexpected rise in the unemployment rate in July poses a potential threat to Vice President Harris's chances, according to Lynch and Anderson.

Navigating the Complexities of Election Predictions

As the 2024 presidential election approaches, the reliability of election polls and the predictive power of the stock market and the Misery Index will continue to be closely watched. While no single indicator can provide a definitive forecast, the surprising correlation between these economic factors and election outcomes suggests that voters and pundits alike would be wise to keep a close eye on the markets and broader economic trends as they try to anticipate the next occupant of the White House.