There is an 82 percent accuracy rate when the S&P stocks rise in an election year, the incumbent president wins, and if prices fall he will lose. Charlie Herman, business and economics editor for WNYC, explains how market numbers seem to influence voters. Forbes magazine reports that the likelihood is even greater, 88 percent.
"If you look at where stocks are going in the three months before a presidential election — August, September, October — if they're going up, the likelihood that the incumbent president will win, or if they're going down, the likelihood that the incumbent president will lose, 82 percent of the time, the direction of that stock market for those three months will dictate who will win the election," Herman says.
The percentage reflects a study based on 100 years of stock market data. In 16 out of the past 20 presidential elections, the formula successfully predicted the winning president. In three of the elections where it did not, third-party candidates played a significant role, and the fourth took place during the Great Depression.
A similar statistic that economists examine is called the Presidential Election Cycle, a model that compares the economy's condition with the corresponding years of a particular president's term. "In general, there's a four year pattern," Herman says. "In the first two years after a president is elected, whether it's first term in office or second term, the stock market doesn't do as well." From there, the market picks up, with the third year being the strongest. In fact, no losses have been reported in the Dow Jones Industrial Average in that third year since 1939.
"The belief is that maybe in his first two years, the president is trying to push through those proposals, those policies, maybe there's a war starting. There's something that's going on that has investors nervous — change," Herman says. "Then you get to the third year and they think, 'Oh, I've got to get re-elected, so I'm going to try and push through initiatives that stimulate the economy, help business, help consumers, help voters."
There is also a correlation between party lines in Congress, the party of the sitting president, and the health of the stock market. "A Democratic president with a Republican [majority] in both houses is usually the best for the stock market," Herman says. "The worst is a Democratic president with a Democratic Congress."