Scarcely a week passes without US president Donald Trump tweeting about the stock market. Trump, who loves to claim the credit when stocks hit new highs, has long viewed a strong stock market as key to his re-election hopes in 2020 – and a new study suggests he may be right.
It seems obvious to say a strong stock market is good for an incumbent president, and a quick glance at the data seems to bear out this idea. Since 1948 how stocks have performed in the three months leading up to a presidential election has correctly predicted the result on 16 of 19 occasions, says Sam Stovall of CFRA Research.
However, it may not be that simple. It’s possible voters pay little or no heed to stock market performance; a strong or weak stock market may merely reflect the broader economy, with these economic conditions then determining how people vote.
It’s also possible that causality runs the other way – that is, politics are driving stock market performance, as opposed to stock market performance determining political outcomes. Existing evidence partly supports this idea, with market prices reflecting expectations of election outcomes. When it appears a business-friendly candidate will win, stocks rise; if the opposite is true, stocks fall. Consequently, stock markets may predict election outcomes, but not necessarily cause them.
Investor voting patterns
Until now, there has been “strikingly little evidence on the impact of the stock market itself on voting patterns”, note the authors of a new paper, Real Effects of Markets on Politics: Evidence from US Presidential Elections. Estimating the impact of the stock market on voting patterns is tricky because there are so many complicating factors. Accordingly, the researchers hone in on a specific area – they compare the voting patterns of voters who invest in the stock market relative to those who don’t. If market performance affected voting, they hypothesise, stock returns would have a stronger relation to voting among investors than non-investors.
Examining the seven presidential elections between 1992 and 2016, they found that, while the stock market may respond to expected election outcomes, "it can simultaneously impact them". When markets were in free-fall in 2008, for example, areas that saw the highest stock market participation rates reduced their support for the incumbent Republican Party by almost five percentage points, whereas there was "almost no change" for the lowest participation counties.
In other words, investors directly impacted by market declines were much more likely to change their voting patterns than non-investors. The researchers project that if stocks had rallied instead of tanking, John McCain could have won key states like Florida, Ohio, Indiana and North Carolina. The study finds the cumulative stock market performance since the last election, as opposed to returns over shorter periods of time, is what matters most for voters’ decisions.
The market effect is smaller in politically active areas as well as in partisan and Republican-leaning areas, the implication being such voters already have strong views that are less likely to be shifted by market returns. Overall, the researchers conclude, the performance of the stock market “may very well affect which party wins a county, a state, and even ultimately, the presidency”.
Why? The obvious explanation is investors vote with their wallets. Other people, the authors add, may judge the president by the state of the economy, and voters with exposure to stocks may rely more on the stock market as an indicator. The market impact on elections could be even larger if some non-investors view the stock market as the government’s economic report card, the study notes.
Israeli elections
This is not the first study to indicate the stock market can influence political attitudes. A recent study found exposure to stock markets made Israeli voters more likely to support negotiations with Palestine.
The researchers outlined how, prior to the 2015 Israeli elections, they gave Palestinian and Israeli assets to likely voters, who were then encouraged to trade them over a seven-week period. By the end, participants had become less likely to vote for hard-line, right-wing parties such as prime minister Benjamin Netanyahu's Likud party.
Giving people exposure to stocks “systematically shifted vote choices towards parties more supportive of the peace process”, with participants becoming more willing to make concessions for peace.
Why? One might assume narrow financial interests were at play, given that peace moves tend to be good for Israeli and Palestinian stocks, but it turns out the results were just as strong among participants who sold all their stocks prior to the election. Not only that, the effect on voting intentions was still evident a year after the experiment ended.
This all suggests stock market exposure made voters more aware of the “broader economic risks of conflict”, confirming the point of French philosopher Montesquieu that commerce “is a cure for the most destructive prejudices”. Financial exposure, the study concludes, “may provide a useful channel for fostering peace”.
Other studies also suggest stock market investments can shape people’s political beliefs. A 2016 study examined what happened in Finland in the aftermath of customer-owned mutual companies converting to publicly-listed firms. This new-found exposure to the stock market made people more inclined to vote for business-friendly, centre-right parties.
Another recent study found fluctuating bond prices during the first World War made investors more likely to vote against the incumbent Democratic Party in the 1920 and 1924 presidential elections. A separate 2018 paper cautioned that the increase in companies delisting from stock markets, coupled with the dearth of initial public offerings (IPOs) since 2000, is "reducing citizen-investors' exposure to corporate profits and thereby undermining popular support for business-friendly policies".
Good for Trump
Needless to say, with the S&P 500 up some 30 per cent since Donald Trump took office, this is good news for the US president.
“If voters were to vote primarily on the basis of their pocketbooks, the president would steamroll the competition,” a recent Moody’s Analytics report stated. The firm used three economic models to assess the 2020 election, based on unemployment data, how people feel about their financial situation, and stock market gains. Each model suggests Trump will be re-elected in 2020.
Moody’s backtesting shows that since 1980, their models have been correct on all but one occasion (2016 was the exception, when a narrow Clinton win was projected). That said, it’s not a done deal. Trump’s edge in the stock market model is not large (he is projected to secure a 289-249 electoral college victory), with Moody’s cautioning his current advantage could be lost in the event of an economic downturn or a run-of-the-mill 12 per cent market correction around election time.
Trump will be hoping that doesn’t happen and is likely to continue keeping a close eye on market movements.
After all, if you have a lot of money invested in a rising stock market, “then you’re going to support that incumbent party, because that’s good for you personally”, says Prof Alan Crane, co-author of the new study. “You have an opportunity for politicians to cater through this particular channel” – an opportunity Donald Trump appears determined not to waste.
