Stock market’s 82% accurate US election signal favours incumbents. Here’s why

US Election 2024: A stock market indicator suggests the incumbent party usually wins if the market rises before the election.

As Americans head to the polls on the final day of a hard-fought presidential race, a well-known financial indicator has captured attention, suggesting that the US stock market’s performance could hint at the election’s outcome.

The method has been accurate in predicting both the 2016 and 2020 elections. (AFP)

According to a CNN report, this “stock market indicator” has demonstrated an 82% accuracy rate in predicting election results since 1944.

The indicator operates on a simple premise: if the US stock market rises in the period leading up to the election, the incumbent party typically retains power. Conversely, if markets trend downward, the opposing party is more likely to win. The pattern has been remarkably consistent, pointing to a link between market optimism and electoral results.

This was devised by CFRA Research’s Sam Stovall, who was quoted as saying, “If the market goes up, the incumbent party typically wins. If the market goes down, the incumbent party gets replaced."

When the S&P 500 falls between the end of July and the end of October, the incumbent party has been replaced 89% of the time, he added.

What happened this year?

The S&P 500 rose 3.3% between July and October this year. So, according to the indicator, it could signal a favourable position for the current administration, the report said. However, there are some caveats to this as well.

The indicator's reasoning is that a rising stock market indicates investor optimism, and a declining one shows economic difficulties, which makes voters seek a different administration.

The report noted that this method has accurately predicted the 2016 and 2020 elections.

For instance, the S&P 500 fell 2.2% in 2016 and 0.04% in 2020, according to the report, leading both administrations' rulings at that time to be changed.

When has the indicator been incorrect?

The indicator has been wrong in some cases, such as the 1968 election, when Hubert Humphrey lost to Richard Nixon. This was because of geopolitical issues such as the Vietnam War in 1968 or the Iran hostage crisis in 1980, which can sometimes override the stock market's influence.

This time, the Russia-Ukraine war and the Israel-Gaza conflict could play a role in influencing the results as well similarly.

However, the market performance for 2024 has been historically strong, with the S&P 500 up nearly 20% by the end of October and the Dow Jones Industrial Average rising 2.4% through the 11 weeks leading up to Election Day.