B. Riley Wealth Management Advisor Talking Points: The Stock Market May Have Picked The Next President
Last week, in my Market Commentary, I stated that Wall Street, the stock market, and investors seem to have priced in a victory for Joe Biden. But on Friday, October 30, 2020, the stock market officially sealed their prediction as to who they believe would win the presidential election.
The “Presidential Predictor”
For almost one hundred years since 1928, the “Presidential Predictor” has accurately called every presidential election winner, except one in 1956.
Here is how the “Presidential Predictor” works. If the stock market, as represented by the S&P 500 Index, is up over the three months before the election from August 1 to October 31, the incumbent political party wins. If it is down, the incumbent political party loses.
With this stock market indicator, it doesn’t matter if the president is a Republican or Democrat—the signal merely shows that in the past, when the S&P 500 Index has declined over this period, it has indicated the defeat of the incumbent political party.
The S&P 500 Index ended Friday, October 30, down 0.6% over the critical three-month period. With this indicator, it has now officially signaled that Joe Biden will win the election.
In 2016, the S&P 500 Index declined by 2.2% during the three months leading up to the Clinton-Trump election. This was one of the few, if not the only, widely used indicators that accurately predicted that President Trump would win the election over Hillary Clinton, the representative of the incumbent political party controlling the White House.
For most of the last three months, stocks have hit new highs, predicting a Trump reelection. But that changed over the past few weeks as Congress refused to pass a new stimulus package for small businesses and the unemployed, the economy has started to slow, the Coronavirus is surging to new highs around the U.S., and the biggest fear is that it may take more than two months, with Supreme Court battles, to find out who finally won the election. The stock market hates that kind of uncertainty.
Many analysts believe the “Presidential Predictor” has been so successful in predicting presidential elections because it tracks investor anxiety and uncertainty around the future.
Institutional investors tend to sell stocks when they sense uncertainty in the future. Remember earlier this year, in March, when Covid-19 plunged the U.S. economy into chaos for several months.
It should be noted that this market indicator hasn’t been perfect. Once, in 1956, the S&P 500 Index declined in the last three months, but President Eisenhower won reelection to the Presidency. That was the only time it was wrong in almost 100 years.
We should know for sure whether it worked again sometime next week—maybe…….
How Should An Investor React?
Stay invested in the stock market! For the last month, I have warned investors to “buckle up” because the stock market would be very volatile right before and after the election. That is what we see now and what we will continue to see if we have a contested election play out in the courts.
It is extremely important to remember this is all politically induced stock market volatility and has nothing to do with the underlying economy.
Even if America has a contested election, people will still be shopping at Walmart, Amazon, and Costco. They will still be using AT&T and Verizon and will still be buying iPhones for Christmas. The underlying economy will not suffer because we don’t know the result of the election for a few weeks.
However, if you try to time the stock market and sell out, you could miss some significant upswings in the market. When the election is finally decided, the stock market will most likely go up that day. If they announce a safe and effective vaccine sometime in November, as expected, the market will likely surge. If Biden or Trump wins and they announce a major infrastructure stimulus package, the market will again likely take off.
If you have sold out of the stock market, you will miss all of these potential market gains, and you will feel the same kind of despair you felt when you thought about selling out of the stock market in January of 2009 and last March 2020. Trying to time the stock market is a fool’s game, and it will be your biggest investing mistake.
Make no mistake about it, there is a time to get out of the stock market, but only when the economy is heading into a long-term bear market recession as we experienced in 2001-2002 and 2008-2009.
Getting out of the stock market because of a health crisis or a political or foreign policy event is always a mistake. These are short-term events that ultimately have zero long-term impact on the underlying economy. Only when the underlying economy starts to go into a long-term bear market recession should you consider lightening up on your equity holdings.
At this moment, the underlying economy is still doing well.
Don’t let some political event destroy your long-term investing retirement plan.
NOTE: This report is authorized for distribution to clients
Paul Dietrich, Chief Investment Strategist, B. Riley Wealth Management
Paul Dietrich is focused on managing investments for private investors, retirement funds, and private institutions throughout the United States. He also serves as a frequent on-air commentator. He regularly contributes market analysis to business and financial media, including CNBC, Fox Business, Bloomberg TV, CNN, The Wall Street Journal, Yahoo! Finance, Reuters, and The Washington Post.
Information and opinions herein are for general use; are not unbiased/impartial; are current at the publication date, subject to change; may be from third parties, and may not be accurate or complete. Past performance is not indicative of future results. This is not a research report or solicitation or recommendation to buy/sell any securities. B. Riley Wealth Management is not engaged in rendering legal, accounting, or tax preparation services. Opinions are the Author’s and do not necessarily reflect those of B. Riley Wealth Management or its affiliates. Investment factors are not fully addressed herein. For important disclosure information, please visit www.brileywealth.com/legal-disclosures.