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Market history tells us to hold on for election surprises: Morning Brief

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A simple indicator that has worked for decades says Trump will win again.

Four years ago, Donald Trump scored an upset victory over Hillary Clinton to win the presidential election.

And four years ago, the stock market was telling those who would listen that this was a live possibility.

And ahead of the 2020 election, stock market history again suggests the president will win. But the market’s suggestion is far from definitive.

Back in June, Ryan Detrick at LPL Research flagged a factoid which noted that since 1984, the S&P 500’s performance during the three months before the election has successfully predicted the winner each time. Since 1928, this indicator has an 87% success rate.

The formula here is simple — if the S&P 500 is higher during the three months before the election, the incumbent party wins; if the S&P 500 is lower during this period, party control of the White House flips.

On August 8, 2016, the S&P 500 closed at 2,180. On November 8, 2016, the S&P 500 closed at 2,131. And a Republican won following two terms of a Democratic administration.

“The Dow had a 9-day losing streak directly ahead of the [2016 election], while copper (more of a President Trump infrastructure play) was up a record 14 days in a row, setting the stage for the change in party leadership in the White House,” Detrick wrote.

The direction of the stock market has a good track record of predicting who will be represented in the White House. (LPL Financial)
The direction of the stock market has a good track record of predicting who will be represented in the White House. (LPL Financial)

And so we’ve kept this indicator in the back of our minds all through the summer and fall here at the Morning Brief, curious about what the market would tell us is set to happen on November 3.

And things could hardly be closer.

On August 3, 2020, the S&P 500 closed at 3,294. On Monday, the S&P 500 closed at 3,310.

Of course, we still have one trading day to go. And this 16 point spread between the August 3 and November 2 closing prices can be closed with just a 0.5% move on Tuesday, an unremarkable spread in an environment when the VIX is sitting in the mid-30s and suggests the market is primed for more volatile action.

Where the market closes on Tuesday, of course, won’t determine the outcome of the election. Through the weekend, almost 70% of the total number of votes cast in 2016 had already been cast. Seen this way, the election doesn’t take place on Tuesday, it merely ends. And even then, ballots will still be counted over the next couple of weeks.

And between the pandemic, the economic recession, and Trump’s polarizing term in office, almost nothing about this election has precedent. Additionally, these quirks of market history that can seem like rock solid predictors often turn out to be just that in hindsight — quirks.

But with so much time spent in the last few months debating what outcomes will or won’t be good for the market — or arguing over which outcomes the market is or is not pricing in — we leave readers with this one simple nugget that may or may not predict what happens later tonight.

By Myles Udland, reporter and co-anchor of The Final Round. Follow him at @MylesUdland

What to watch today

Economy

  • 10:00 a.m. ET: Factory Orders, September (0.8% expected, 0.7% in August)
  • 10:00 a.m. ET: Durable Goods Orders, September final (1.9% in prior print)
  • 10:00 a.m. ET: Durable Goods Orders Excluding Transportation, September final (0.8% in prior print)
  • 10:00 a.m. ET: Non-Defense Capital Goods Orders Excluding Aircraft, September final (1.0% in prior print)
  • 10:00 a.m. ET: Non-Defense Capital Goods Shipments Excluding Aircraft, September final (0.3% in prior print)

Earnings

Pre-market

  • 6:30 a.m. ET: Humana (HUM) is expected to report adjusted earnings of $2.83 per share on revenue of $18.6 billion
  • 6:50 a.m. ET: Exelon (EXC) is expected to report adjusted earnings of 87 cents per share on revenue of $8.41 billion
  • 7:00 a.m. ET: Wayfair (W) is expected to report adjusted earnings of 85 cents per share on revenue of $3.67 billion
  • 7:00 a.m. ET: McKesson (MCKis expected to report adjusted earnings of $3.86 per share on revenue of $59.39 billion

Post-market

  • 4:20 p.m. ET: Prudential Financial (PRUis expected to report adjusted earnings of $2.71 per share on revenue of $13.46 billion

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