The stock market is usually a good predictor of presidential winners, but this year is different

The worst pandemic in a century and one of the sharpest downturns since the Great Depression are making the usual winning signs harder to read.

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But this year, their ability to serve as tea leaves could be thrown because of unusual circumstances: the economic fallout from the worst global pandemic in a century and one of the sharpest downturns since the Great Depression.

America has been gripped by recession since the spring and the stock market witnessed a historic 34% plunge after the pandemic battered the economy. Recessions and major market declines typically don’t bode well for incumbents like President Donald Trump, who is battling for re-election against Democratic challenger Joe Biden. 

Following a coronavirus-fueled selloff in March, the S&P 500 has staged a stunning rebound to record highs in August, even as the economy remains in a recession. While many have seen their retirement balances recover with the market turnaround, the nation has recouped slightly less than half the unprecedented 22 million jobs wiped out in early spring.

So what could this mean for the 2020 election? If the stock market continues to recover between now and Election Day, that would favor Trump, experts say. 

"The recent strength that we’ve seen in stocks signals that Wall Street is siding more with Trump winning re-election,” says Ryan Detrick, senior market strategist at LPL Financial, an independent broker-dealer.

Since 1928, the stock market has forecast the winner of the election 87% of the time, including every single one since 1984, according to LPL Financial.

When the S&P 500 stock index has been higher in the three months leading up to the election, the incumbent party has usually won. When stocks were lower during that period, the incumbent party typically lost.

In 2016, for instance, Hillary Clinton was favored to win the presidency, but the stock market suggested otherwise. Stocks were weak leading up to the election, with the Dow Jones industrial average lower nine consecutive days.

There have only been three exceptions. In 1956, incumbent President Dwight D. Eisenhower still won even though the stock market was down in the three months leading up to the election. In 1968, President Lyndon B. Johnson didn’t run for re-election. Democratic nominee Hubert Horatio Humphrey lost even with stocks higher. And in 1980, President Jimmy Carter, who faced a recession that year, lost even though the market was up that three month span.

“If the market were to enter into a steeper correction between now and Election Day, it would likely have to do with concerns over the pace of the economic recovery from COVID-19," says Ed Clissold, chief U.S. strategist at Ned Davis Research.

To be sure, stock market downturns don’t always happen during recessions. But both happening at the same time are typically one of the worst events for an incumbent. 

Since 1900, the incumbent party has won three times and lost eight when there was a 20% decline in the Dow in the election year, according to Ned Davis Research. The last incumbent to win when a recession and a stock-market drop of that magnitude both occurred was President Harry Truman in 1948. 

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