The Stock Market Has Chosen Its Winner for the 2020 Election

How an analysis of the market predicts the President-to-be.

Shourya Agarwal
Nov 2, 2020 · 3 min read
Source: Bloomberg

The internet is ablaze with predictions about the election. Most exit-polls feature concealed algorithms that make us doubt their credibility. Only if we had a giant, public database reflecting the collective pulse of the nation, a lot of jittery nerves could be calmed down. But guess what, there exists a vast ocean of unadulterated data in our plain sight — the stock market. Because people’s economic decisions are shaped by their expectations of the future, historically the market has an excellent track record in forecasting the next President. In 2020, Wall Street seems to be backing VP Biden as its contender to clinch the electoral college with a razor-thin difference.

Source: Fortune

Before entering into the domain of unilateral reporting, I would concede that this approach is not absolute and has been effective for about 90% of the time since the Second World War. Moreover, it's crucial to remember that the market is giving more of an inkling than an indication this time. However, the signal is extremely crucial because the sample size reflects millions of investors who have shown their apprehension about President Trump’s reelection. As the data looks at the last three months where the market was anyways in a steep recovery from the Coronavirus shock, a decline of 0.6% is far more consequential than it appears, unveiling that the investors are uncertain about future policies.

While there is no established reasoning for why the S&P 500 has such a high accuracy when it comes to the winner of the presidential election, analysts believe that it is related to uncertainty around the future. Investors have a propensity to sell stocks when they are unclear about how the fiscal policy will play out. Just like how earlier this year the uncertainty about COVID response plunged the world market into chaos. If a new President were to enter they would be likely to introduce a new set of policies. As these policies/regulations will govern the future of the business cycle, the investors are likely to sell if they are uncertain about the future. Hence, the explanation goes, that the selloff in the past three months implies general confidence in the entry of a new president, signaling a favorable outcome to the Democrats.

The small indication given by the S&P 500 seems to echo the forecasts from Wall Street giants. The analysts at Goldman Sachs believe foresee an outcome in which the Democrats will secure the White House and the Senate while holding on to their grip over the House of Representatives. Numerous other esteemed market strategists like Jason Draho from UBS, Citigroup’s Tobias Levkovich, and Dubravko Lakos from JP Morgan Chase see strong indications of a blue upsurge. These opinions indicate that Wall Street who has shown a commendable track-record at exit polling has picked its favorite in Vice President Biden. However, it's important to remind ourselves that all opinions stress the fact that the difference between the candidates will be infinitesimal.

That being said, recent years serve as strong reminders of the fallibility of the forecasts. One only needs to recount the outcome of the previous election to ascertain that predictions are often dumb-founded in the face of people’s choices. Despite the inherent margin of error in all forecasts out there, I feel that the stock market is one of the most trust-worthy indicators due to the sheer volume of intersectional investors that decide its trajectory. In the past, there have been instances of voters not expressing their actual intentions in the surveys and their economic decisions are a better estimate of their opinions. Irrespective of the trends it is extremely important that the people go out and exercise their vote and not allow anyone to stir a Pygmalion effect during this election.

More by Shourya Agarwal in Dialogue and Discourse

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