Chart Of The Day: Is The Rising S&P 500 Really Indicating A Trump Win?

 | Nov 03, 2020 10:38AM ET

No election is ever like any other. It’s impossible to compare social, political and economic climates in different eras. However, we have had one constant—a stock market indicator that, up until now at least, has been providing consistent, accurate results.

While this indicator is remarkably simple, in our view it appears to illustrate the overall mood at the time.

By that measure, when US stocks were up in the three-month period before a presidential election, the incumbent or his party remained in office in 20 out of 23 contests, or 87% of the time. Since 1984, the same metric has worked 100% of the time.

But why would an equity move of 1% in either direction predict the next leader of the free world so consistently? Statistically speaking, the number of events is not representative, but there is another element beyond the math. It’s the psychology.

Most analysts use a three month period from July 31 until Oct. 31 as the gauge. As such, they've already forecast a Biden win, since the preceding rout during September and October pressured stocks into negative territory—down 0.87% for the S&P 500 Index.

However that timeframe may have been a mistake. Voters aren't financial analysts, and the analytical three-month period doesn't take into account that many people don't decide who they'll vote for till right before they cast their ballot. Otherwise, why would candidates still be campaigning? Candidates continue right up to election day because they know people change their minds. Which is why, for this metric we should consider stock prices up until election day.

As of yesterday’s closing prices, the S&P 500 was +0.5% since its Aug. 3 closing price, and if futures are a signal for today’s performance, the indicator will provide a green light for President Donald Trump for another four years.

Of course, this isn't a hard and fast indicator, especially during a year when so many early ballots have already been cast—a record 97 million, which is over two-thirds of the total 2016 vote. Using that earlier timeframe, of votes submitted before election day, the indicator, with stocks in negative territory until yesterday, could have been accurately signaling a Biden win instead.

Still, we won't know how reliable this metric will be till all the votes are counted. And that could take some time.

However using technical charts, we can at least forecast which way the SPX may be headed next. And the hourly chart shows signs of a continued rebound.