Does a Relationship Exist Between the S&P 500 and the US Election Outcome?

Introduction

The relationship between the S&P 500 stock and the outcome of the US election has been a topic of interest. Past data suggests that the performance of the S&P 500 can be used to predict the winner of the election with an 87% success rate. If the stocks are higher three months before the election compared to the beginning of the year, the incumbent party is likely to win. However, the reliability of the S&P 500 as an indicator has been called into question due to the impact of the COVID-19 pandemic. This article explores the historical analysis of past presidential races, their impact on elections, and the relevance of the S&P 500 in predicting the 2020 US election outcome.

How to Presidential approval ratings compare over the last 20 years?

Analysis of past presidential races and their impact on elections

Bush’s Presidency Punctuated by Crisis

George W. Bush inherited an economy on the brink of collapse in 2001. The dot-com bubble and the September 11, 2001 terrorist attacks had a significant impact on the stock market and the world at large. To address these issues, President Bush implemented two fiscal moves – the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). These policies aimed to provide relief across the board, but some analysts argue that they primarily benefited high-income households. Additionally, Bush authorized wars in Afghanistan and Iraq following the 9/11 attacks. While there is some sensitivity of the markets to changes in the probability of war, the evidence does not show a clear link between Bush’s military actions and the changing value of the S&P 500. Despite overseeing economic expansion and two recessions, Bush’s tenure ended with the stock market in trouble, experiencing a -40% drop in S&P 500 returns.

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Obama Elected as US Society Demands Change

In 2009, President Barack Obama entered office during the midst of the Great Recession. His campaign focused on the promise of change and represented a contrast to the previous Bush administration. The lead up to Obama’s inauguration was marked by societal desires for stability and change. While the wars overseas continued, there was hope that Obama would bring an end to them. The economy played a significant role in the Obama vs. McCain race, as people were looking for a new direction. Obama’s reputation, along with the improvement in unemployment rates leading up to the election, boosted voter support. The interplay between societal factors and economics was evident during Obama’s tenure, where his first term was driven by public sentiment towards change, while the second term focused more on economic stability and job creation.

Trump’s Ascent to Power

Unlike his predecessors, President Trump entered office without inheriting a recession. However, he campaigned on the idea that the economy was under threat from China. Trump aimed to reassert US dominance by bringing businesses back home, which resonated with many Americans who were concerned about foreign investors, particularly China, having a significant hold on US imports, exports, and national debt. Trump’s policies included tax cuts, particularly for businesses, as well as a strong focus on reducing China’s influence through trade policies. Prior to the COVID-19 pandemic, Trump’s economic policies appeared to have a positive impact on the US economy and the S&P 500, with significant returns and low unemployment rates.

Trump and Biden’s plans for dealing with current crises

In the context of the 2020 presidential race, both Trump and Biden will have to grapple with the global pandemic. Prior to the outbreak of COVID-19, Trump’s economic policies had a positive impact on the US economy and the S&P 500. However, the pandemic brought about a sudden halt in economic growth, resulting in quarantine measures, business bankruptcies, and millions of job losses. Trump responded with a stimulus package to provide relief for individuals and businesses. The recovery of the US economy has been uneven, with the technology sector performing well while other sectors, such as energy and financials, struggle. Biden, on the other hand, has outlined his plans to address the current crises, including addressing public health concerns, providing economic relief, and working towards job creation and economic stability.

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The complexity of the US presidential race

The US presidential race is influenced by a complex interplay of societal and economic factors. In the case of Bush’s presidency, economic issues played a significant role, while societal factors were the focus during Obama’s election. Trump’s campaign capitalized on the desire for change and his aggressive economic policies. The question of whether voters prioritize economic stability or societal stability is key to understanding the outcome of the next election. The COVID-19 pandemic has brought additional social and economic issues into focus, making the winner of the election responsible not only for managing the S&P 500 but also for handling the broader crises facing the nation.

Conclusion

The relationship between the S&P 500 stock and the outcome of the US election has historically shown a certain degree of predictability. However, the impact of the COVID-19 pandemic has raised questions about the reliability of the S&P 500 as an indicator in the current election cycle. The analysis of past presidential races highlights the importance of societal and economic factors in influencing elections. The upcoming election will require the candidates to address the challenges posed by the global pandemic, as well as focus on economic stability and social issues to resonate with voters. Ultimately, the outcome of the election will hinge on the voters’ priorities and which candidate they perceive as best equipped to address the complex challenges facing the nation.