Can the Stock Market Predict the Presidential Race?

S&P's Sam Stovall says the S&P 500 index's showing in the months leading up to the election has been a good predictor of the winning party

By Sam Stovall From Standard & Poor's Equity Research

Election junkies are poring over countless polls and other predictive tools to get a read on who will win the U.S. Presidential contest on Nov. 4 between Senators John McCain (R-Ariz.) and Barack Obama (D-Ill.). But they might also want to take a look at what the stock market has to say.

Historically, the price performance of the Standard & Poor's 500-stock index during the three calendar months leading up to the U.S. Presidential election has been a good predictor of whether the President or his party would be reelected or replaced.

Take a took at the accompanying table. An S&P 500 price rise traditionally has predicted the reelection of the incumbent person or party, while a price decline has pointed to a replacement. Since 1928, this election prognostication technique has done an excellent job, in our view, recording a 79% accuracy rate in predicting the reelection of the party in power and an 83% success rate in calling for a change of party.

The model's ability to identify changes in political parties that occupy the White House was supreme, as it was correct five of six times for an 83% success rate. The only time it incorrectly forecast a change in party was in 1956. The market's three-month decline of 7.7% did not cause the unseating of President Dwight Eisenhower by Adlai Stevenson, probably because everybody still liked Ike.

What about this year? Since the S&P 500 has declined 24.7% from July 31 through Oct. 30, it would be fair to say that the model points to—but does not guarantee—an Obama victory.

Stovall is chief investment strategist for Standard & Poor's Equity Research Services .