- How do voters at the polls react to the performance of the Dow Jones, S&P 500?
- This study examines the indices 1 year and 3 months before elections
- Do voters consider stock performance as an election approaches?
This is a special report that will analyze the performance of the S&P 500 and Dow Jones leading up to the 22 presidential elections since 1932. I will examine how the two indices performed on average one year and 3 months before an election, comparing their returns against whether or not the incumbent party won.
BACKGROUND
First, let us consider how might the performance in stocks affect elections in the first place? The price of a stock represents ownership of a portion of a corporation, and is influenced by supply and demand forces reflecting the given firm’s expected prospects. Some stocks will pay you a dividend and grant you voting rights in shareholder meetings. But most importantly, you gain the right to sell the stock in the future.
If the price of a stock increases in value, the holder can make a profit by selling at a higher price than where they entered. If investors think that a business can make more returns in the future, boosting demand for their shares, then the price will often increase. There can be both specific and systematic forces that determine which way a stock can go. This piece focuses on the latter, or how the state of the US economy as a whole drives stocks.
The S&P 500 and Dow Jones are stock indices that weight key sectors in the economy differently, such as information technology, real estate and energy. If their returns are positive heading into an election, this could be because investors expect the underlying businesses to generate more profits in the future. This could be due to a positive outlook for economic growth, perhaps increasing the chances of the incumbent party retaining its power.
Conversely, if stock returns are negative heading into an election, it could be due to a more negative outlook for growth. If this is the case, then one might reasonably assume that the party running for reelection could be at a higher risk of losing its position. That is only the case, of course, if voters generally value the performance of stock markets. This is a limitation in this study, discussed in further detail at the end.
STOCK MARKET RETURNS 1 YEAR BEFORE PRESIDENTIAL ELECTION
Of the 22 elections since 1932, there were 18 cases when returns in the S&P 500 and Dow Jones one year before a presidential election averaged positive. Of those 18 cases, the incumbent party won 11 times, or about 61.11%. Returns in the stock market were negative the other 4 times. Of those, the incumbent party lost 3 times, or about 75% - see table below.
HOW STOCK MARKETS PERFORM 3 MONTHS BEFORE PRESIDENTIAL ELECTION
What is the effect of changing the time frame from 1 year to 3 months before an election in this study? In this case, of the 22 instances, there were 13 when stock returns were positive. Of those instances, the incumbent party won 11 times, or 84.62%. On the other hand, there were 8 instances when stock returns were negative. The incumbent party lost 7 times in this case, for about an 88.89% failure rate.
CONCLUSION
In brief, the 3-month data seems to show more consistent results compared to 1-year out. More often than not, the performance of the stock market closer to an election seems to match with whether or not an incumbent party wins. It should be noted that correlation does not mean causation. It could be that voters pay more attention to stocks 3 months before an election as they become more aware of current events in preparation for voting. There are some limitations to this study.
STUDY LIMITATIONS
The election sample size is limited to 22, more observations tend to improve the accuracy of results.
This data does not take into account how much voters care about stock returns around elections. According to Gallup, as of June 4 2020, about 55% of Americans reported owning stock.
This data does not take into account the magnitude of gains versus losses in stocks around election years. That is, do higher stock returns increase the probability of an incumbent party winning and vice versa?
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