The stock market's election year performance between July 31 and Oct. 31 has often accurately predicted the next president — and this year it's pointing to a victory by Donald Trump, if history is a guide.
Sam Stovall, chief investment strategist at CFRA, says the market's decline this fall has been a bad omen for the incumbent party and Hillary Clinton, who still holds a six point national lead in a new poll. The S&P 500 is down 2.2 percent since its close of 2,173 on July 29, a Friday and the last trading day of July.
"Going back to World War II, the S&P 500 performance between July 31 and Oct. 31 has accurately predicted a challenger victory 86 percent of the time when the stock market performance has been negative," he said. The one time in eight that the incumbent party won with a negative stock market was in 1956, when Adlai Stevenson challenged President Dwight D. Eisenhower.
Stovall said in that year, Britain and France joined with Israel in a military action against Egypt over the Suez Canal. It was also the year of the Hungarian Revolution.
"This time around if the Democrats retain the White House, I will come up with two responses. One is that history is a guide but never gospel, and two, the negative performance by the market could be a reflection of the worry of domination that a Democratic sweep would bring," said Stovall.
The market had been concerned about the possibility that Democrats would take the House of Representatives, but on Monday, after new revelations about an FBI probe into emails of a Clinton staffer, those worries were pushed into the background.
Stovall said when the market has been higher in the same period, the incumbent party won 82 percent of the time since World War II. The exceptions have been 1968, when there was a third-party challenger, George Wallace, and in 1980, when the third-party candidate was John Anderson. Gary Johnson is the third-party Libertarian candidate this year.
Even though probabilities have slipped, Clinton remains favored to beat Trump in the prediction market. PredictIt.org had her odds at 71 percent.
Daniel Clifton, head of policy research at Strategas, said it still looks as if Clinton will win, but the latest investigation news may affect the down-ballot Congressional races. He too notes that the historic guide of market performance prior to the election is not pointing to a win by the Democrat. He said when market performance over the three months leading up to election day has been negative, there has never been a victory by the incumbent party going back to 1984. So far, the S&P 500 is down about 2.5 percent since Aug. 8, three months before the election Nov. 8.
"We've now gotten this black swan event on Friday. It may have impact, it may not have any impact," said Clifton, adding the market may be signalling Clinton wins by less than people expect. He said the stock market usually rallies in the last week before the election.
"I would say on face value it's saying prepare to be surprised on Tuesday," said Stovall.
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