Donald Trump’s ‘stunning’ upset in the US presidential election was perhaps less remarkable and unexpected than we’ve been led to believe.
You might balk at the idea that you could have predicted the result with 86% accuracy. But it’s true.
By following the stock markets.
In the past century, the stock market has made a remarkable habit of predicting success at the polls in the US.
Here’s how it works in theory: When the Dow Jones index is robust and trending upward, the incumbent party’s chances of success in the elections rise. On the other hand, a struggling Dow spurs voters to oust the presiding party from power.
Looking back over the past 22 US election cycles, this simple rule is impressive in its consistency.
I first wrote about this stock market/election-picking predictor three months ago. At the time, I explained how robust this system was in calling an election ahead of time:
‘It’s remarkable how consistent this trend has been over such a long period of time. In fact, going back as far as 1928, there have only been three exceptions to this rule.
‘In 1956, it was popular incumbent Dwight D Eisenhower who secured a second term in office, despite a 2.6% decline in the market in the three months leading up to the election.
‘In 1968, it was Richard Nixon who ousted the Democrats from office, despite US markets rising 6.5%. (It is debatable, though, whether Nixon would have won had John F Kennedy lived out to see his term, putting the Democrats campaign on a stronger footing. Instead, Nixon was pitted against little known Hubert Humphrey, who had succeed Lyndon B Johnson, and duly won.)
‘The most recent time the result bucked the trend was in 1980, when Ronald Reagan dumped the Carter administration from the White House…
‘Other than those three exceptions, market swings in the lead up to an election have predicted the results accurately on 19 occasions. That’s not an anomaly. It’s a trend.’
Make that 20 now. Out of 23. Or 86.9%, for the mathematically inclined.
Yet, when you think about it, this makes a lot of sense.
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Stock markets rise when economies are robust and growing. That is, when voters believing that an economy is strong (regardless of whether that is true), you are likely to see it reflected in rising stock prices as more people pile into equities.
At the same time, any perceived hiccups in the economy will have investors reaching for safety. That usually means an exodus out of stocks and into perceived ‘safer’ assets, like cash. Again, people merely have to perceive it to be that way, even if the truth is altogether different.
Now, before we look at how the Dow Jones fared over the past three months to November, we should touch on another important factor.
Crucially, the US Federal Reserve held back on making any monetary policy changes during this period. Despite ongoing speculation about the timing of the Fed’s expected interest rate ‘lift off’, it has kept rates on hold. As a result, neither candidate benefited from any decision one way or the other.
With that out of the way, let’s now look at the chart:
Source: Yahoo Finance
While there are fluctuations in the Dow from week to week, the trend line shows an obvious pattern. The Dow has declined for each of the past three months. The low point prior to the election is marked by greyed out date (4 November) on the chart. While that was still four days out from the election, the spike in the days leading up to the election was not enough to write off the overall three-month decline. On 8 November, the Dow was still 400 points lower than at the same point three months prior.
And while the Dow cratered once it became clear that Trump was going to win, those losses were fleeting. As you can see, the Dow has since hit a three-month high. Not only that, but it’s now at its all-time peak…
Follow the Dow
Can it really be as simple as that? Can the direction of the Dow predict the US election ahead of time?
Well, we should be careful not to confuse correlation with causation. Clearly, there’s a correlation between stock market performance and election outcomes. An 86% success rate is not anomalous — it’s a trend. On its own, that makes it a powerful tool with which to make educated guesses about the outcomes of future elections. This simple indicator was enough to predict Trump taking the White House — as it was on 19 other occasions dating back a century.
But causation is another matter altogether, and one that is much harder to pin down. Truthfully, there may be no causal factors to explain this run of predictions. But the relationship is intriguing nonetheless, and its accuracy is striking.
Ultimately, we are, by nature, short-termists. If we feel richer, we’re more likely to spend money on making ourselves even richer through stocks. If we feel poorer, we’ll cut back. And we’ll attribute our sense of gain or loss of prosperity to the incumbent government, whether we realise it or not.
When markets rise, we seek to re-elect incumbent parties. When they fall, we look to punish them. Americans punished the Democrats, and rewarded Republican nominee Donald Trump — a stunning upset made a little less remarkable by those that were tracking the Dow.
Contributor, Markets and Money
PS: The post-Trump euphoria across markets could prove to be the calm before the storm. Markets and Money’s Vern Gowdie believes we’re at the beginning of the next crisis.
Vern is the Founder of The Gowdie Letter and Gowdie Family Wealth advisory services. As one of Australia’s top financial planners, Vern says the next crisis is already in motion.
He warns that stocks won’t be the only market that crashes when things blow up. There’s another multibillion dollar market that’s poised to collapse when the credit bubble pops.
Australia has gone through two credit bubbles in its history. The third, and latest, has built up over the past 65 years. When it pops, the impact will leave a lasting mark on the global economy. One that makes the 2008 financial crisis look like child’s play.
The fallout of this crash could damage your wealth. But you can safeguard your wealth from the worst effects of the coming crisis, if you take action.
Vern will show you how to do this, and more, in his brand new report, ‘Global Financial Crisis 2016: 3 Crisis Scenarios, and How They’ll Impact Australia’. To get your free copy today, click here.