Presidential elections can be understood as referenda on the economy. If people think things are going well, they tend to vote with the incumbent party. If they think things are going poorly, they tend to vote in opposition. This year may buck that trend.
The S&P 500 has been a somewhat reliable indicator of the economy as it impacts voting. If the S&P rose during the 3 months prior to the election, the incumbent party retained control of the White House 82% of the time. Since World War II, this trend has held. The index fell 2.2% in that period this year. Is this good news for Donald Trump?
The answer is complicated. The problem with any generalization about presidential elections is that the sample size is very small. Since World War II, there have only been 19 presidential elections. Any statistician will tell you there’s no way to generalize from only 19 points of data. The correlation between the performance of the S&P 500 and the results of the presidential election is a curious coincidence, but it’s hard to read causation from such a limited pool of data.
It’s also possible that the broad correlation could be true, but that we could be in one of the 18% of years when it doesn’t hold up. Flip a coin twice. If both came up heads, that’s only slightly more likely than this being one of the exception years. The fact is it’s neither a large enough sample nor a strong enough correlation to be anything other than amusing coincidence.
The conventional wisdom still holds, though, that the economy is one of the central issues in a presidential election. Rather than looking to one specific index as an indicator, it’d be better to take an amalgam of economic indicators. Sure, the major markets have cooled in the time since July, but the unemployment rate has dropped and wages are up. For most people, those are more meaningful assessments of the performance of the economy.
In prior years, the performance of markets has tracked relatively closely with other economic indicators. After the 2008 financial crisis, jobs and wages remained stagnant even after stock prices began to rebound. It’s entirely possible to read the recent slowdown in the market as more of a reset than a poor performance. Market growth had exceeded wage growth. Now, the two are catching up. Some economic indicators point to growth, others to contraction. It’s not possible to say definitively that the economy is doing one thing or another.
This isn’t to say things are rosy in the Clinton camp. The revelations about the contents of Hillary’s e-mails on Sunday could be enough voter suppression in battleground states to put Trump on the path to electoral victory, or at least a hung electoral college. This election is still a hotly contested one, and it’s unlikely that any political prognosticators will be able to go to bed early tonight.