Follow S&P 500, and you will know who wins the elections

From share prices, we can predict whether Donald Trump or Hillary Clinton will be the new resident of the White House. Jeff Hirsch, editor-in-chief at Stock Trader’s Almanac, the annual of the American stock markets, who is also a well-known portfolio manager says that if S&P 500 and Dow Jones indexes do not change in the finish of the campaign, or they even grow, then the candidate from the party of the current president will win. However, if there was a crash on capital markets in the next few weeks, it would be fairly safe to say that the other candidate, Donald Trump in this particular case, wins.

Péter Zentai: USA Today, the only national daily of the United States shared your thoughts that there is no public opinion survey which could compete with the stock market. What do you base this statement on?
Jeff Hirsch: The thorough study of the development of American indexes in the last 100 years was proved to be absolutely valuable at making predictions. Considering this data, I do not take high risk if I say that the outcome of the presidential elections can be predicted at 90% certainty, based on the development trends of Dow and S&P 500 indexes three months before the end of the elections.

We have already entered those aforementioned three months. Lately, share prices have started rising …
According to the history of exchange market, the current market development indicates the victory of the Democratic Party.

It surprises me because as far as I know, capital market investors prefer republican presidents over democrats.
There is no point to approach this issue from an emotional perspective. It does not matter whether major American investors lean towards republicans or not; their personal world view is irrelevant. Based on facts and data, we can say the following: since the end of WWII, the Dow Jones index has generated more profit during the presidency of democrats than in cycles of republicans.
However, the performance and forecasting role of stock market indexes, especially in the finish of presidential elections, are more relevant now. In this regard, the party of the possibly winning candidate is not important. The only thing we can learn from the development of S&P 500 in the last three months before the elections is that if it is strong, then there is a 90% chance for the victory of the candidate who is from the party of the outgoing president. However, if this index shows a steadily falling tendency in the election year and especially in the finish, then we can expect the success of the other party’s candidate. Since 1928, the results of 19 out of 22 elections confirm this concept.

I read that in 1968 and 1980, despite the strong stock exchange, the candidate of the party that was in office, lost…
In 1968, the terrible casualties of the Vietnam War, and the general opposition to it, along with anti-war movements all contributed to the fall of President Johnson and the democrats. In 1980, stock market highs were overshadowed by the world political slip-ups of the democratic president, Jimmy Carter. The majority of the people believed that he and his party weakened the recognition of the United States.

Many people already think that Obama has done the same during his office; that he weakened the recognition of the country, the economy hardly improved, and share prices increased only because of zero bank interests.
Almost one hundred years of American stock exchange history suggests that investors – regardless of base interest rate – always get rid of their shares in the years of presidential elections, when the growth of American national economy is expected to drop, or even turn into recession.
Investors in the current election year and the first phase of the finish, which is vital for the campaign, do not seem to have any particular problem with the Obama-era, and expect its continuation.

What if Donald Trump wins?
In such a scenario, based on stock exchange history, S&P 500 will fall significantly – at least in the first year of the term of office of the new president. My recommendation to anyone who expects the victory of Donald Trump is to play the fall of S&P.

Original date of Hungarian publication: August 16, 2016