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Stock Market as Political Pollster

Mark Hulbert looks at how the stock market performs in those election years when the incumbent party wins, in contrast to its returns when the incumbent party loses.

President Donald Trump faced a bigger threat in January than even impeachment: the stock market.

That’s because the Dow Jones Industrial Average in January fell 1.0%. That put the stock market’s performance in the first month of this year right in line with its average return in those past election year Januarys in which the incumbent political party ended up losing.

In contrast, the Dow historically has produced an average gain of 0.4% in those election-year Januarys in which the incumbent party was reelected.

No wonder President Trump has been talking the stock market higher and jawboning the Federal Reserve to lower interest rates even further.

Regardless of the cause, the first 10 days of February undoubtedly have allowed the president to breathe easier. The Dow has been so strong over the first sessions of the year that it’s now sporting a year-to-date gain of more than 3%. That’s far more consistent with the president winning re-election in November.

These differences are summarized in the accompanying chart. Notice that there is a distinct correlation in presidential election years between the stock market’s performance and the incumbent’s chances.

Hulbert Chart 021120

To be sure, as statisticians constantly remind us, correlation is not causation. Most likely it is a separate cause altogether -- the economy, for example -- that is causing both the stock market’s election-year returns and the incumbent’s reelection chances. Regardless, the data suggest that the stock market is a particularly sensitive barometer of those chances.

Note carefully, furthermore, that this pattern is not dependent on the incumbent’s political party. Regardless of whether it is a Democrat or a Republican in the White House, he (or his party, if he isn’t running for reelection) is far more likely to win when the stock market’s year-to-date performance has been good on Election Day.

It is also interesting to note that it makes little difference to the incumbent’s chances how the stock market has performed in the years prior to the election year. It’s a classic case of “what have you done for me lately?” The stock market can be a stellar performer in the first three years of a president’s term and he or she still will struggle to win reelection if the stock market loses ground in the fourth year.

This may explain why Trump is under such pressure to talk the stock market higher, and why he trumpeted the stock market’s performance in his recent State of the Union address. Though the stock market was a stellar performer in the first three years of his term, it is its performance this year that will be the better predictor of whether he gets to keep his job after November.

And right now it’s looking like he will.