- The S&P 500 has correctly predicted the election winner 87% of the time for nearly a century, although four major events this year pose a greater challenge to the 2020 vote, a top strategist said in a BNY Mellon webcast on Thursday.
- The incumbent party generally secures victory when stocks are higher in the 3-month period before an election than they were at the start of the year. If not, the opposition tends to win.
- Dan Clifton, a strategist with Strategas Research, predicted the next two months would be the "wildest" ever in politics, and provided a 3-point framework to understand potential outcomes.
- He said Democrats could end up hurting themselves if they choose to vote through mail-in ballots, as that dramatically increases chances of error and delays the process.
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The S&P 500 index has correctly predicted the winner of the US presidential election 87% of the time over the last almost-100 years, strategist Dan Clifton of Strategas Research Partners said at a BNY Mellon webcast on Thursday.
If stocks are higher in the 3-month period before the election than they were at the beginning of the year, the incumbent party generally tends to win. If they are lower, it's the opposition that tends to take the White House.
Right now, it's tight. The S&P 500 hit record highs on Wednesday, but has since dropped by nearly 7%, leaving it with a year-to-date gain of just 3.7%. The most recent data has reflected an economy that is recovering, but at an ever-slower pace.
However, four "transformational" events in 2020 — the COVID-19 pandemic, an ensuing recession, mass protests against racial injustice, and a US presidential election — pose a great challenge to potential outcomes this year, he said.
Going back a hundred years, "I can only find three of these instances ever happening in one year, and that happened just three times," Clifton said, adding that 2020 is a rare situation, with an increased range of outcomes.
Clifton said anybody claiming they know what will happen is "not being honest" and it is important for investors to plan around different scenarios.
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In case of a contested election, confirming the results could drag on as late as mid-December — a timeframe to note ahead of the critical tax deadline of December 31.
Clifton said the next two months would be the "wildest" ever in politics, and provided a 3-point framework to understand potential outcomes:
- Understand what's happening in the economy and with COVID-19
- Establish the mood in key swing states
- When the COVID-19 caseload was rising, there was a referendum on Donald Trump. But since cases peaked, it has become more of a choice between Trump and Joe Biden.
A traditional presidential election could take place if COVID-19 is restrained, but if it comes flaring back in September and October when children go back to school, a likely referendum on Trump would not be good for his reelection process, Clifton said.
He referenced the Gallup Approval Rating to monitor multi-day polls as it is linear-related to the percentage of votes a president receives in an election.
"The race is tightening because the economy is getting better," Clifton said.
The Atlanta Fed's GDP model predicts a third-quarter GDP growth rate of 29.6%, up from a prior estimate of 28.5%.
Clifton highlighted that the fastest growth rate ever seen before an election in the US was 6.2%, which means that current predictions are about five times the average rate.
Strategas forecasts Biden's win probability at about 55%, which means Trump is at about 45% — closer race than what polls suggest.
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