Our analysis suggests the 2020 presidential race is still up in the air. If the economy continues to open up, a vaccine is on the way, and the massive stimulus continues to drive asset prices higher, President Trump’s chances may improve. A weak economy struggling to come out of recession and weaker markets would likely favor challenger former Vice President Joe Biden.
And Watch The Stock Market
Since 1928, the stock market has accurately predicted the winner of the presidential election 87% of the time, including every single election since 1984. It’s quite simple. When the S&P 500 has been higher the three months before the election, the incumbent party usually has won; when stocks were lower, the incumbent party usually has lost.
Think back to 2016, when virtually no one expected Hillary Clinton to lose—except for the stock market. Stocks were quite weak leading up to the election, with the Dow Jones Industrial Average down nine days in a row. Copper (a President Trump play on infrastructure) was in the green a record 14 consecutive days.
Potential Policy Changes
Markets tend to be volatile ahead of elections because of the uncertainty around possible policy changes. In this election, the stakes are particularly high for corporate America because a takeover of the Senate by Democrats and a possible Biden victory reportedly may lead to an increase in the corporate tax rate from 21% to 28% and unwind the corporate earnings boost the 2017 Tax Cut and Jobs Act delivered.
Other areas to watch that could impact markets:
• Tighter financial regulation could have some market impact.
• Health care should perform well regardless of the election outcome with “Medicare for All” off the table.
• Energy could be hurt by a potential blue wave, but prices may get support from lower production and higher production costs.
As we get closer to the November election, how stocks and the economy are doing could be a big signal for who will win the election and be in office in January.
Ryan Detrick is senior market strategist for LPL Financial.