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Does a Relationship Exist Between the S&P 500 and the US Election Outcome?
Politics and history aside, previous data suggests that S&P 500 stocks can be used to predict the winner of the U.S. election. The S&P 500 has an 87 percent success rate in predicting election outcomes. The ruling party is likely to win if share prices in the three months before the election are higher than they were at the start of the year, the data showed.
Stock performance is a key point in analyzing any presidency. But is the S&P 500 still a reliable indicator given the impact of COVID-19? Are we living in unprecedented times where previous success metrics no longer hold true, or has the pandemic exposed problems we’ve seen before?
To answer these questions, we need to look back at past presidential elections and analyze what each sitting president has inherited, how they have handled it, and how this affects future elections. In the sections that follow, we’ll examine the issues each president faced, how they responded, and what changed during their tenure. This analysis, combined with the volatility of the S&P 500, can make predictions about the 2020 US election.
- The Bush presidency is full of crises
Obama was elected because US society demands change
Trump’s turbulent rise to power
How do Trump and Biden want to deal with the current crisis?
Bush’s Presidency Punctuated by Crisis
George W. Bush inherited an economy that was on the brink of collapse when he became president of the United States in 2001. The stock market was hit by the dot-com bubble, and the terrorist attacks of September 11, 2001, would ignite a war that would not only change America, but the world.
Solving Policy and Encountering Problems: Tax Cuts and War
In response to the stock market crash of the early 2000s, President Bush made two major fiscal moves:
- Economic Growth Balance and Tax Relief Act of 2001 (EGTRRA)
Reconciling Jobs and Growth through the Tax Relief Act of 2003 (JGTRRA)
These two measures relieved the pressure across the board. However, some analysts point to key support for high-income households, with the top 1% receiving an effective 5% annual tax cut.At the same time that Bush cut taxes, he was also directing the wars in Afghanistan and Iraq. After the September 11, 2001 attacks, he authorized the invasion of Afghanistan, followed by a second military attack on Iraq two years later. Military spending doubled, from $300 billion in 2001 to $600 billion in 2008. The surge has had an impact on the U.S. economy, as well as the S&P 500, but not as badly as many thought.
As Leigh et al. The U.S. market could be “extremely sensitive to changes in the likelihood of war,” according to the National Bureau of Research (NBER). The day after the 9/11 terrorist attacks, the S&P 500 fell 4.9%. Li et al. Also note that a 10% increase in the odds of overthrowing Saddam Hussein caused the S&P 500 to drop 0.5%.
As such, it can be argued that policy changes may be too insignificant and temporary to have a long-term impact on the index. While the threat of war has had some impact on the market, the above evidence does not show an undeniable link between Bush’s military actions and the changing value of the S&P 500. Therefore, from a purely economic perspective, the war is unlikely to lead to overt support for Bush.
Look at the Bush Administration: What have we learned?
While overseeing the economic expansion, President Bush also went through two recessions, and the U.S. debt-to-GDP ratio reached 68%.
Looking back at the factors that made Bush president, the economy was the deciding factor. No matter how successful his policies are, American voters see them as a way out of trouble at a time when a major industry, the Internet, is collapsing. Its response to the terrorist attacks of September 11, 2001 was acceptable, but perhaps not ideal either economically or socially. Overall, the economic factors are enough to keep Bush in office for two terms. However, when his tenure ended, Americans were ready for a change.
Obama Elected as US Society Demands Change
Just as Bush inherited a weak economy, President Barack Obama faced a financial crisis in 2009. Two years after the Great Depression, Obama entered the campaign with a simple message: “We can believe in change.” Not only was Obama seen as the antithesis of Bush, he also wanted to be the first black president in American history.
Policies to Correct and Problems Encountered: It’s Time for a Change
The period before Obama took office is often seen as a time of political and social change. Although his presidency will not end overseas wars, there is hope. Under President Bush, the United States has suffered two recessions and two wars. Ready for sweeping change, voters trust Obama to bring about change.
Unlike the Bush era, when the economy shaped public opinion and social desires shaped the rivalry between Obama and McCain. Both Obama and McCain are ranked as the two most popular candidates in recent history. An October 2008 Gallup poll showed Obama’s approval rating at 61 percent, while McCain’s approval rating fell only a few points to 57 percent. It could be a sign that American voters desperately need a president who can set a new direction. We can compare this to Donald Trump’s 45.5% approval rating before the 2016 election.
Based on this evidence, we can imagine that the economy and the US economy were key factors during the Bush campaign. But by the time Obama came along, public sentiment had turned to stabilize the ship. Then, when Trump was elected, US voters refocused on the economy.
Consumer Confidence, Jobs and Obama Stock Growth
While Obama’s reputation and political style are important, the economy cannot be ignored. According to the Bureau of Labor Statistics, the unemployment rate rose from less than 5% in December 2007 to 7.2% a year later. Unemployment rose in the first days of Obama’s presidency.
But by October 2012, just weeks before US voters went to the polls, the unemployment rate had dropped to 8 percent. That halted a rally, and voters in an NBC News poll took it as a sign that Obama’s economic policies were changing. That led to a 15-point increase in approval ratings, with 42 percent of respondents believing the economy would improve under the incumbent over challenger Mitt Romney.
A Look at the Obama Administration: What Have We Learned?
What we can learn from Obama’s two concepts is the interplay of economic and social factors. In winning his first term, Obama was the face of change: a person who represented a change in public opinion who did not base his policies solely on strict economics. The economy became an even bigger problem when he ran for a second term. People need jobs and they think Obama is the guy who can do it.
This offers an interesting parallel to the modern world. Social factors may not prevail in Donald Trump’s second term. However, the problem may be at work. Its America First strategy ensured economic growth until the outbreak of the COVID-19 pandemic in the first quarter of 2020. Now that US jobless claims are at a record high (more than 830,000 a week in September 2020), voters can support candidates who can handle the jobs crisis, just as they supported Obama in 2009.
Trump’s Ascent to Power
Unlike his predecessors, Trump has not inherited a recession. However, he has entered an economy he believes is threatened by China. Previous trade deals and China’s entry into the World Trade Organization (WTO) under Bush mean that the US is no longer the sole superpower.
Whether the conflict is man-made or inevitable, Trump’s campaign relies on reasserting America’s dominance by bringing businesses home. Make America great again is his mantra. Despite the economic strength, many Americans are unhappy that foreign investors, especially China, have a significant impact on US imports and exports and the national debt.
In 2011, China held $1.3 trillion in US Treasuries. China also controls 15% of world exports. Trump has made this one of the most important battlegrounds. He believes that China’s dominance is an economic problem that Hillary Clinton can’t solve, but he can. In many ways, this was an important factor influencing the election.
The Trump Administration in Brief: What Have We Learned?
Trump was elected to office with the goal of promoting business and curbing China’s influence. At home, he pushed for tax cuts, especially for businesses. In 2017, President Trump proposed reducing the corporate tax rate from 35% to 20% and eliminating the estate tax. He also reduced the number of federal tax brackets for individuals from seven to three: 12%, 25% and 35%. Finally, the economic activity income declared in the personal declaration is taxed at 25%.
While targeting American companies, Trump has also started attacking China. The trade war was fueled by the desire for America First. Trump’s priority has been to restore lost manufacturing jobs in other countries, including China. Reducing the trade deficit and restoring America’s superpower status have always been incompatible with China’s economic development.
Trump’s policies worked. At the start of 2020, the unemployment rate was below 4% and economic growth was similar to that of the Obama administration.
How Are Trump & Biden Planning to Deal with Current Crises?
The 2020 presidential candidates must deal with a global pandemic. Before the COVID-19 outbreak in 2020, President Trump had a positive impact on the U.S. economy and the S&P 500. The S&P 500 under Trump has returned 48% through February 2020. While they have fallen to 43%, his tenure has been less positive for investors than Obama, but more positive than Bush.
However, the 2020 shutdown ended three years of economic growth. COVID-19 has caused quarantines, bankruptcies and millions of people to lose their jobs in the United States. That could hurt future stock market debates between Trump and Obama. But more importantly, it means the winner of the next election will have to worry not only about the S&P 500’s movements, but also social and economic issues.
COVID affects all areas of life
Between March 21 and May 28, 40 million U.S. citizens filed for unemployment insurance. In response, Trump signed a $2 trillion stimulus package called the Coronavirus Aid, Relief, and Economic Security Act (CARES). By August 2020, real GDP was 4% lower than when Trump took office. Trump’s stock market volatility, however, has been at work as the index rose 54%. Although the S and P 500 fell 34% when COVID-19 hit, they have since rebounded to new all-time highs.
Much of the recovery can be attributed to the technology sector. Energy and financial stocks have lost 37% and 20%, respectively, in 2020. By contrast, the S&P’s tech sector is up 25%. The surge was aided by the performance of Amazon and Apple during the lockdown. The technology boost, combined with stimulus overseen by President Trump, has allowed the U.S. economy to recover.
The US Presidential Race is a Complex Equation
Society and business have a long history in U.S. elections. The Bush era was marked by economic problems. Although his approval ratings are lower than other presidents, his policies have something to bring voters back. Bush may not have solved the financial problems, but it feels like the country is getting rid of them. This has prompted voters to pay more attention to social issues. In this climate, Obama embodies the idea of change.
When his time came, the economy became an issue again. Trump took advantage of this. Like Obama, he is a transformative president. However, his moves included aggressive policies to stimulate the economy. This resonated with voters. Is it time for another change? Do voters prefer economic or social stability? In times of big trouble, this is the key question. The issues voters are grappling with appear to determine who becomes the next U.S. president.
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