Who Do Markets Want to Win the Election?

Election Year Update

Election season is in full swing as Super Tuesday solidifies another Biden and Trump rematch this November. President Biden won all 15 states and the Iowa caucuses, while former President Trump won in 14 of 15 states, prompting Nikki Haley to end her election bid.

Under the premise the market hates uncertainty, the lack of any surprises into the primaries and little doubt over who will be on the ballot this fall have been among many catalysts driving U.S. equity markets higher this year. Coming into Super Tuesday, the S&P 500 was up over 7% and history suggests this could be a good sign for President Biden’s chance of reelection.

Since 1976, when Super Tuesday first surfaced, market performance ahead of the primaries has correlated closely with election results. While acknowledging the limited data, when the S&P 500 was higher ahead of Super Tuesday, the incumbent president’s political party won the election four of the last five times. And when stocks were lower into Super Tuesday, the incumbent president’s party lost the election six of the last seven times.

S&P 500 and Super Tuesdays (1976–2020)

Source: LPL Research, Bloomberg 03/07/24
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.

Looking Ahead

With Super Tuesday in the rearview mirror, the market is now looking ahead to election night with a bit more clarity. Perhaps unsurprisingly, seasonal strength for stocks also tends to pick up after Super Tuesday. Since 1952, election-year lows have been set during the first quarter 72% of the time, with March having the highest frequency. In terms of annual election-year returns, the S&P 500 has generated an average price return of 7.3% (excluding dividends) during all election years since 1952. However, when election years are positive, as they tend to be (83% of the time), the average price return jumps to 12.2%. Also, during a reelection year such as this year, or with a Democrat incumbent president, the S&P 500 has posted average annual price returns of 12.8% and 11.4%, respectively.

Election Year Seasonality Heats Up

Source: LPL Research, Bloomberg 03/07/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90.

Who Does the Market Want to Win?

Rather than speculate on how each nominee’s potential policies may or may not impact the equity market, we examined how the market has reacted to the changes in each candidate’s probability of winning the election. More specifically, we analyzed the correlation between the daily percent change of the S&P 500 and the daily percent change of President Biden and former President Trump’s probabilities of winning the election, based on odds from predictit.org.

In short, the market appears to be welcoming the higher probability of a Trump victory, evidenced by a rising correlation between his chances of winning the election and the S&P 500 over the last few months. In contrast, President Biden’s predictit.org odds have slid lower since the start of the year, and as a result, are negatively correlated to S&P 500 performance.

Election Odds & Market Performance

Source: LPL Research, Bloomberg. PredictIt.org 03/07/24
Disclosures: Past performance is no guarantee of future results.

Summary

Stocks are off to an impressive start this election year, and seasonal trends suggest the momentum could continue. While LPL Research expects some pullbacks along the way, political clarity into the November election leaves the market with one less thing to worry about. Signals from the market over the potential election winner have been mixed. The positive performance into Super Tuesday points to a potential Biden victory. However, recent equity market performance has become increasingly correlated with the odds of an election victory for former President Trump.