If Dow above 28,052 on Election Day, then Trump Is an 87% Favorite

"When the stock market gained 0-20% over the prior three years, the incumbent won only 55% of the time,"

From polls and various prediction markets, you'd think Joe Biden is the strong favorite in the 2020 election. Yet research from the Socionomics Institute suggests that Donald Trump, not Biden, will be the strong favorite if the Dow Jones Industrial Average stays at its current level or higher.

In a 2012 study, Institute scholars found that the overall net change in the stock market in the three years leading up to a presidential election was a better re-election indicator than GDP, inflation, and unemployment combined. The researchers recently revisited that work. They discovered that dating back to George Washington's run for another term in 1792, 16 incumbents ran for re-election when the stock market had a three-year net gain of 20% or more. 14 of them won.

That works out to an 87% re-election rate.

For this election, a 20% three-year net gain equals 28,052 in the Dow.

"What matters is not where the Dow is today but where it is on Election Day," Matt Lampert, the Institute's director, explains. "With today's volatility, a lot can happen in the market between now and November 3."

The researchers concede that Trump is a controversial figure and that the pandemic has made 2020 an unusual year. The historical tendency may not hold this time. But they point out that other controversial presidents won when the stock market was on their side.

"Richard Nixon is a great example," says Lampert. "He got re-elected at the top of the market in 1972 and was hounded from office less than two years later as the Dow had what was its biggest slide since the Great Depression."

Lampert says the team's findings make sense in the context of socioeconomic theory, which proposes that the stock market reflects the social mood. "People generally do not cast their vote based on the stock market," he explains. "Rather, when the social mood becomes more positive, people express the mood by bidding up stock prices and being more inclined to re-elect the leader. Both actions are the consequences of a positive social mood. And they do the opposite when the social mood gets more negative."

And Democrats shouldn't dismay. History says the election would be a coin flip if the Dow were to be merely below 28,052 when Americans go to the polls. "When the stock market gained 0-20% over the prior three years, the incumbent won only 55% of the time," reveals Lampert.

Chart Attribute: This chart shows the key levels to watch in the Dow as the 2020 race enters the home stretch. / Source: Socionomics Institute

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