Indicator of the Week: Is the Dow Predicting a Win for Hillary?

A Dow Jones Industrial Average (DJIA) drop over the next few months could hurt Hillary Clinton's presidential chances, if history repeats itself

Senior Quantitative Analyst
Aug 24, 2016 at 6:58 AM
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The S&P 500 Index (SPX) has not moved more than 1% in a day, in either direction, in more than six weeks. So this week, I'll focus on something a little more exciting: the upcoming presidential election. If you recall, before the year started, there were warnings about the eighth year of a president's term being pretty bad for the stock market; I'll look at how that's playing out. Also, I'll see if the stock market has been a decent indicator of determining the winner of the election. 

A President's 8th Year: The table below shows the Dow Jones Industrial Average (DJIA) return in the eighth year of a president's term. You can see only one time in the six previous years the Dow had a positive return -- that was 1988, when the index gained 11.8%. The last time an eighth year occurred was in 2008, when the Dow tumbled more than 30% in the year. The chart under the table shows how this year has compared to the others. The good news is that 2016 has so far outpaced all the other years, and the year-to-date return so far mostly resembles 1988. Furthermore, in 1988, the Dow went on to increase 9% from this point through the rest of the year. 

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Stock Market Election Indicator: Since 2013 -- the first full year after the 2012 election -- the Dow has added over 40%, an impressive amount. You would expect that when stocks do well it would be a good sign for the incumbent party in the next election. The table below strengthens this theory.

Over the past 29 elections, going back to 1900, the Dow has been up more than 20% in the preceding four years before the election about half the time. When the Dow was up at least 20%, the incumbent party won the election 80% of the time. When the Dow was worse than this, the incumbent party won just over 40% of the time. 

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The table above looks like good news for Hillary Clinton, but do voters think shorter term than this? I wondered if the return over just the final two months of the campaign meant anything for predicting the election. Is there evidence that voters can be swayed by just the final two months into Election Day?

The table below shows this might be the case. When the Dow has fallen in the two months leading up to Election Day, the incumbent party didn't even win a quarter of the time (23%). When the Dow was positive in those two months, the incumbent party won an astounding 15 of 16 times. Maybe Donald Trump should use his campaign funds to short Dow stocks and drive down the index.  

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