The Economy, Not Markets, Decides Elections

Incomes growth is a big deal, and it's still weak.

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Dean Catino

Next Tuesday is Election Day and the so-called experts have been attempting to predict the race for months. As usual, there is no clear consensus.

The presidential election results are very much intertwined with the markets and the economy, but markets don’t decide elections. The stock market does not generally predict the outcome of the election—a weak stock market does not favor the challenger, and a strong stock market does not favor the incumbent. A good example of this would be George H.W. Bush; he lost the 1992 election, even though the stock market was up 57 percent during his term. Franklin D. Roosevelt was re-elected in his third and fourth terms despite losses in the stock market. Voters are not generally willing to tie stock market returns directly to the president.

After the election, however, there does appear to be an impact on the stock market depending on whether the incumbent or challenger is elected. For example, there is often a material impact on corporate profits that is a direct result from regulatory policy coming from the White House or legislation passed by Congress, which this time could mean moves for industries that are heavily regulated such as financials, healthcare, and energy, to name a few. But broadly, the market performs well in an election year. In fact, over the last 16 presidential election cycles, there have been only three election years that suffered a stock market loss (as of this writing, the S&P 500 is up around 12 percent ).

Voters wait in line to pick up their ballots inside the Hamilton County Board of Elections after it opened for early voting in Cincinnati.

From a historical perspective economic data, not stock market performance, serve as a predictor of whether the incumbent wins or loses.

James Carville is credited with saying, “It’s the economy, stupid,” and he’s right. Look at the inflation-adjusted, after-tax income growth in the year leading up to the election. If that measure of growth is around 3-4 percent, the incumbent historically gets 50 percent of the popular vote. Many voters tend to vote their pocketbooks, and the income measure also captures several other key factors including the unemployment rate. As reported by Joseph Carson, U.S. economist for AllianceBernstein, after-tax, inflation-adjusted income rose at only a 0.8 percent annual rate in the third quarter. This suggests that the president faces an uphill re-election battle, though clearly, factors other than inflation, taxes and income have a bearing on the election. However, income growth and related job creation are key measures by which a presidency is judged and they often determine the election outcome.

I will make my prediction next Wednesday morning. I’ve never have been wrong yet.

Dean J. Catino, CFP®, CPRC, is a managing director and cofounder of Monument Wealth Management in Alexandria, Va., a full-service investment and wealth management firm. Securities offered through LPL Financial. Member FINRA/SIPC. Monument Wealth Management has been featured in several national media sources over the past several years. Follow Dean and Monument Wealth Management on their blog, Off The Wall, on Twitter at @MonumentWealth, and on their Facebook page.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate please consult your financial advisor prior to investing. All performance references are historical and are not a guarantee of future results. All indices are unmanaged and may not be invested into directly.