America’s S&P 500 “has a record of prescience that is hard to exaggerate”, says Lu Wang on Bloomberg.com. Since 1928 it has signalled who will win the White House on 19 of 22 occasions. When the market climbs in the three months before the vote, the candidate from the incumbent party wins. The idea is that the market is a reflection of the economy, and a healthy economy provides a tailwind for the ruling party.
The financial media are full of statistics like these, and investors should take them with a huge pinch of salt. Correlation is not causation. Stocks tend to go up most of the time anyway, and the White House’s policies – assuming they pass through Congress undiluted – will just be one of a wide array of potential influences on the course of the economy.
It’s also worth noting that “the stockmarket has rarely been as divorced from the economy as in the last seven years”, as Wang points out. Stocks have raced ahead of the fundamentals, thanks to unprecedented liquidity injections from the Federal Reserve. So this indicator is not only statistical noise, but it no longer makes sense on its own terms.