Markets Have Outperformed When a President Seeks Reelection
By now you’ve all heard the news. Joe Biden, the Democrats’ presumptive nominee for president, has selected as his running mate Kamala Harris, junior senator from California and the state’s former attorney general.
If elected, she would be not only the first woman vice president in U.S. history but also the first Black American and first Indian American.
Biden’s announcement is as good an occasion as any for investors to start thinking about the upcoming election, less than three months away. Although Biden’s proposals aren’t nearly as radical as, say, Bernie Sanders’ or Elizabeth Warren’s, his administration could very well bring about significant policy changes that may impact your investments—especially if the Democrats maintain the House and take control of the Senate.
But first, what are markets telling us about the election? As legendary value investor Benjamin Graham once said, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
Pay Attention to the Three Months Before the Election
The three months preceding the election are a crucial time. According to the presidential election cycle theory, when the market rose from July 31 to October 31, the incumbent party has tended to win the presidency. And when the market slumped, it’s the challenging party that’s been victorious.
Look at the 2016 election as an example. Polls strongly favored Hillary Clinton, the incumbent party’s nominee, but Mr. Market had other ideas. The S&P 500 fell 1.7 percent in the three months leading up to Election Day, and the challenging party’s nominee, Donald Trump, won the White House.
Since World War II, this trend has had a 72 percent win rate. Put another way, investors have accurately “voted” for the winning candidate roughly three out of every four times. And if we exclude the 2000 election, the win rate increases to 78 percent, or one-in-five.