MARKET WATCH
The Dow’s indication of who will win the U.S. presidency deserves to be taken seriously
The correlation between the Dow’s year-to-date return through mid-October and the incumbent party’s chances of winning are significant at the 97% confidence level.
The Dow Jones Industrial Average’s
DJIA0.37% strong year-to-date return translates to a 72% probability that the Democratic candidate, Vice President Kamala Harris, will win the presidential election in November.
Just two months ago the Dow was assigning a 64% probability to a Harris victory (as I wrote at the time). And when I devoted a column in May to this subject, the probability of a Democratic victory was judged to be 58%. The increases in probabilities since then are due to the stock market’s strength; there’s a statistically significant correlation between the Dow’s election-year performance and the incumbent political party’s chances of retaining the White House.
A 72% probability of a Democratic victory is much higher than the 43% chance that the electronic futures markets currently place (according to the aggregator site Election Betting Odds).
Which measure deserves your attention?
There’s no clear answer. Electronic futures markets are a relatively recent phenomenon, making it difficult for their track records to be statistically significant. But this is not the case with the Dow, since we have data for more than 30 presidential elections dating back to the late 1800s. I calculate that the correlation between the Dow’s year-to-date return through mid-October and the incumbent party’s chances of winning are significant at a 97% confidence level.
The greater the stock market’s year-to-date return going into the presidential election, the greater the chances the incumbent party will win. Consider:
- In all years in which the Dow’s year-to-date gain as of Oct. 15 was greater than 10% — like this year, with the Dow up 13.4% as of Oct. 15 — the incumbent party won 78% of the time.
- When the year-to-date gain was positive but below 10%, the incumbent party won 60% of the time.
- When the Dow in mid-October was sitting on a year-to-date loss, the incumbent party’s chances of winning fell to 42%.
The theoretical basis for believing the stock market is a good political predictor is that it is a sensitive leading indicator of the economy’s future performance. People tend to vote their pocketbooks.
You might think that this year is proving to be an exception, since consumer sentiment has been weak even as the U.S. stock market has been strong. But when I conducted a head-to-head statistical test of consumer sentiment and the stock market, the latter came out ahead in being a better predictor of presidential election outcomes.
The bottom line: The Dow’s indication of who will win the presidency deserves to be taken seriously.
