The Dow Jones Industrial Average’s performance as a predictor of U.S. presidential election outcomes should not be overlooked.
The correlation between the Dow’s year-to-date return by mid-October and the incumbent party’s chances of victory is significant, reaching a 97% confidence level.
As of now, the Dow’s strong year-to-date return translates to a 72% probability that the Democratic candidate, Vice President Kamala Harris, will win the upcoming presidential election. This is a notable increase from just two months ago, when the Dow suggested a 64% chance of a Harris victory. Back in May, that probability stood at 58%.
The strengthening stock market has been a major factor behind these rising probabilities, as historical data shows a statistically significant relationship between the Dow’s election-year performance and the incumbent party’s chances of retaining the White House.
Interestingly, this 72% probability of a Democratic win contrasts sharply with the 43% chance assigned by electronic futures markets, according to Election Betting Odds. Which of these measures should you trust?
There is no definitive answer. Electronic futures markets are relatively new, and their track record isn’t substantial enough to be statistically significant. On the other hand, the Dow’s track record spans over 30 presidential elections, dating back to the late 1800s. My analysis shows a robust correlation between the Dow’s mid-October year-to-date return and the incumbent party’s odds of winning, with a 97% confidence level.
Historical data further supports the connection between the stock market’s performance and election outcomes:
- When the Dow’s year-to-date gain as of October 15 exceeded 10%—as it has this year, with a 13.4% gain—the incumbent party won 78% of the time.
- When the gain was positive but below 10%, the incumbent party won 60% of the time.
- However, when the Dow posted a year-to-date loss by mid-October, the incumbent party’s chances of winning dropped to 42%.
The stock market’s predictive power is rooted in its role as a forward-looking indicator of economic performance, and voters often base their decisions on the state of the economy. While consumer sentiment has been weak this year, despite a strong stock market, statistical analysis shows that the stock market remains a more reliable predictor of election outcomes.
In conclusion, the Dow’s signals about the presidential race deserve serious attention.
