July 25, 2024

Stock Market Signals: Predicting the 2024 Presidential Election

As the 2024 presidential election approaches, an unexpected yet remarkably reliable predictor of the outcome has emerged: the U.S. stock market, specifically the Dow Jones Industrial Average (DJIA). President Joe Biden’s chances of winning reelection, currently pegged at 58.8%, are significantly influenced by this financial indicator.

Historically, the stock market has been a strong predictor of whether the incumbent party will maintain control of the White House. This finding is particularly relevant now, given the mixed signals from electronic prediction markets. Traditionally relied upon for their forecasting abilities, these markets have recently delivered a wide range of probabilities for Biden’s reelection, from as low as 38% to as high as 76%. Such a broad spectrum of predictions undermines their reliability and leaves analysts searching for more dependable indicators.

In an effort to identify more consistent predictors, I analyzed various economic, financial, and sentiment indicators, including the U.S. stock market, real GDP, the Conference Board’s Consumer Confidence Index, and the University of Michigan’s Consumer Sentiment Survey. By focusing on year-to-date changes up to Election Day, it became evident that only the stock market exhibited a significant correlation with the incumbent party’s chances of winning, meeting the 95% confidence level commonly used by statisticians to validate genuine patterns.

The accompanying chart illustrates this finding. By categorizing all presidential elections since the DJIA’s inception in 1896 into four equal groups based on the year-to-date return on Election Day, a clear pattern emerges. The likelihood of the incumbent party retaining the presidency increases proportionally with the stock market’s performance.

Given the DJIA’s year-to-date gain of 5.6%, historical correlations suggest that Biden’s chances of winning reelection stand at 58.8%. This probability will adjust accordingly with market movements; an increase in the DJIA would bolster his chances, while a decline would diminish them.

Even in the absence of conflicting messages from electronic prediction markets, the stock market’s track record would still stand out. Prediction markets like the Iowa Electronic Markets (IEM), which began in 1988, have only a limited history of nine presidential elections, making it challenging to establish statistically significant patterns. In contrast, the DJIA offers a much longer historical perspective.

The importance of economic indicators in elections is not new. James Carville, strategist for former President Bill Clinton during the 1992 election, famously emphasized the economy’s pivotal role with the line, “It’s the economy, stupid.” Given the current findings, this adage might be updated to “It’s the stock market, stupid.” The stock market’s performance not only reflects the broader economic landscape but also influences voter sentiment and confidence, making it a critical factor in the upcoming election.

In conclusion, as the 2024 presidential election draws nearer, the stock market emerges as a powerful predictor of the incumbent party’s success. President Biden’s current 58.8% chance of reelection, derived from the DJIA’s performance, highlights the significant role financial markets play in political outcomes. Observing the stock market trends in the months leading up to Election Day will provide valuable insights into the potential direction of the election results.

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