Predicting how elections do (or don’t) affect the markets

November 4, 2014

Presidential elections usually bring out both more voters and more spurious correlations serving as prognosticators, but in lieu of a litany of crackpot, sports-related guesses at the winners of tonight’s midterms, we’ll trust in the polls and await the final numbers.

But on to a more important question: Can we use the results of today’s elections to line our pockets by predicting future market trends? Alas, trying to derive a short-term investment plan from a synthesis of today’s results seems chancy at best. As one can see when comparing this Reuters graphic with historical midterm gains in the House and the Senate, there is little correlation between one party’s success and the market’s reaction through the end of the year.

In 1990, all five indices rose at least 5 percentage points, even as the National Bureau of Economic Research made an announcement to expect an announcement of the date the 1990-91 recession had started.

The 1994 midterms saw the GOP sweep into control of both houses for the first tine in 40 years, but the markets seemed to balk at Newt Gingrich’s Contract With America, slipping on every index except the Dow, which remained stagnant.

With the peace and prosperity of the Clinton years at its peak, even the presidential sex scandal couldn’t demolish the Democrats in the 1998 midterms, as they won in the Senate by not further losing it, and picked up five seats  in the House while the markets surged.

In 2002, on the heels of the dot-bomb and 9/11 recession, Republicans made marginal gains and the markets slid; in 2006, Bush backlash beat up the GOP and the markets showed modest advances; in 2010, Democrats paid for the Great Recession, losing control of the House in a landslide—and all five indices enjoyed healthy increases.

If there’s a lesson to be drawn from this, it’s that markets have more impact on elections than elections have on markets, and that—fun as they might be—spurious correlations are spurious, and good, old fashioned graft beats guessing on the markets.

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