Few institutions have a better track record calling presidential races than the U.S. stock market. At the moment, it’s sending information that counts against Democrat Hillary Clinton.
The performance of the S&P 500 Index has signaled the outcome of every presidential election since 1984, according to an analysis by Strategas Research Partners LLC. A gain in the benchmark for American equity in the three months prior to the vote has seen the incumbent party win 86 percent of the time since 1928. Right now, the benchmark gauge is down 3.6 percent since Aug. 8 with just a week until the vote, a fact that in isolation augurs well for Donald Trump.
Aside from the three-month interval, the S&P 500 fell Tuesday by the most in three weeks, slipping for a sixth day to 2,111.72, making its first foray below 2,100 since July 7 before rebounding. The gauge is in its longest slide since August 2015 amid polls showing the race for the White House is tightening. The CBOE Volatility Index surged Tuesday by 9 percent to the highest since June 27.
Logically, the stock market’s record of prescience is derived from its sensitivity to the economy, with falling shares potentially correlating with consumer discontent that might break in favor of a challenger. While this year’s signal ranks with the weaker ones historically, it comes as growth in gross domestic product is sluggish and follows the biggest monthly retreat in consumer confidence in a year. Some analysts also wonder if Federal Reserve stimulus has made stocks a less reliable signal of economic health than they were in the past.
“People may be saying ‘I think Clinton is going to win,’ but people are not putting their money to work on the fear of a Brexit like event,” said Daniel Clifton, head of policy research at Strategas Research Partners. “The range of outcomes has been increasing in recent weeks rather than decreasing.”
The reputation of markets in handicapping politics took a beating in June, when stocks around the world soared prior to the U.K. referendum only to fall the most in five years when voters chose to secede. Just four months removed from that shock, anxiety levels have spiked in the final week of an election season marked by twists. Clinton’s once-dominant lead over Republican Donald Trump has withered in polls since news Friday that her e-mails remain a topic of interest to the FBI.
Those hoping to use equities as a thermometer should be aware that the stock market has rarely been as divorced from the economy as in the last seven years. Helped along by near-zero interest rates, the S&P 500 has returned 3.7 percent a quarter on average since March 2009, compared with a 0.9 percent gain in gross domestic product. That gap is the widest since World War II.
Fed rate intentions are playing a role, with odds that the central bank tightens this year surging past 70 percent. That’s helped boost financial shares about 1 percent since Aug. 8. Banks and tech shares are the only of 11 groups in the S&P 500 that have gained. Phone, real-estate and utility shares have plunged in that period, as rising odds for higher interest rates damped enthusiasm for stocks coveted for their high dividend payouts.
The banking sector is also the industry most closely tied to the election and favors Trump, according to analysis by Bloomberg. The S&P 500 Investment Banking and Brokerage index has rallied 13 percent in the last three months.
“Despite the fact that Clinton has been ahead in the polls and is likely to win, most of the traditional industries that you would expect would do better under a Republican presidency have done better,” said Michael Arone, the Boston-based chief investment strategist at State Street Global Advisors’ U.S. intermediary business.
U.S. equities led a selloff in riskier assets Tuesday following an ABC News/Washington Post tracking poll that showed Trump with 46 percent support to Clinton’s 45 percent. Gold surged more than 1 percent, the dollar weakened versus the Swiss franc and Mexico’s peso, considered an inverse proxy for Trump’s election fortunes, tumbled.
Real estate and utility stocks slid more than 1.7 percent. Apple Inc. dropped 2.1 percent to weigh down the technology group, and Pfizer Inc. lost 2 percent as its quarterly profit fell short of estimates. The Dow Jones Industrial Average lost 105.25 points, or 0.6 percent, to 18,037.17.
“We have the Fed tomorrow, jobs on Friday and the election Tuesday,” said Mark Kepner, managing director and equity trader at Themis Trading LLC in Chatham, New Jersey. “You definitely have the fear factor rising today. Is it more election fear and pricing in the possibility of a Republican victory? Maybe. You also have numbers today that look like the Fed is still on track to raise rates in December.”