Stock Market Can Predict Who Wins the 2020 Elections

If the past few elections are any indicator, then the stock market can predict who wins the 2020 elections. History shows that when the market rallies months before elections, the incumbent wins.

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BTIG analyst Julian Emanuel looked into the correlation between the market and elections. He found out that since 1928, incumbents have won 90%  when the S&P is positive for the last three months. There were also six times where incumbents lost their seats as the market tanked months before. Republicans lost in 1932, 1960, and 2008, while Democrats fell in 1952, 2000, and 2016.

What happens this year?

As far as the market goes, this year is still up for grabs. While August was one of the market's best-ever performing months, September is off to a rocky start.

August was not your typical pandemic month. Both S&P and Nasdaq recorded highs during the last few days of the month. Tech stocks overran the market, bringing other stocks along with them. Things ground to a halt during last Thursday's selloff, triggering concerns from investors. A bottoming out is still uncertain as September is usually the hardest month. Dow Jones reported that the S&P is 54% down in September over the past 93 years, with an average return of -0.96%. Election years are less brutal though at -0.3%. 

This year, though, some are already preparing for the worst. With fears that election outcomes may be tighter than expected. Delays in the announcement of winners may affect the market.

Where's It Going So Far?

If the market holds up and keeps up the bullish activity, the Trump White House may hold the advantage. Outside of the stock market's performance, the Democrats have the upper hand. According to an NBC/WSJ poll, presidential nominee Joe Biden is leading Trump by 9%, but the gap is narrowing. If the trend continues, the market may see investors dashing for the exits as election day nears.

There are discussions on which sectors of the market will thrive under Trump or Biden. With Dems leading, infrastructure, renewable energy, health care, and cannabis stocks are up. If Trump wins, fossil fuel, defense contractors, and bank stocks will rise.

Or Is It The Other Way Around?

Shawn Snyder of Citi Personal Wealth Management says it's hard to say which is which. He said, “It is hard to say whether stocks drive 2020 elections or the other way around.”

From an investor perspective, the science makes sense. If investors think Trump will win, it's assumed that current policies will continue. Thus, investors are likely to keep their portfolios intact. If Biden looks to win and policy changes are imminent, expect shifts in the market in the form of selloffs.

If the S&P is the predictor, then it's too early to tell. The gains made over the last few months are beginning to erode, as the S&P fell 4.3%. The numbers are still positive, the year's gains stand at 6.1%. This might be a case of the market letting off steam. Or it may not.

Many analysts agree, though: the winner won't affect the market much. Biden nor Trump won’t be as big of an influence on the stock market, as some would suggest. Snyders remarked that “A good company with good earnings is more of a driver than Washington.”

The next few weeks will determine the direction in which way the market heads. The stock market predictor is still in play, and it's still anybody's ball game at this point.

One thing, though: This is 2020, and none of the usual rules apply at the moment. With the pandemic and the market displaying wild symptoms, nothing is certain. If 2020 decides to stay true to its nature, we may see upheavals even on the election front. After all, if's there's a year where records and rules get broken, this may be the year for it.

Watch this as CNBC Television talks about how the 2020 elections could affect markets:

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Given how you see the current stock market scenario, do you think Trump will remain President? Or is it the challenger, Joe Biden that's about to move in with the win? Let us know what you think by leaving comments below!