The race for the White House is down to the homestretch, and although presidential candidate Joe Biden is comfortably ahead in the election polls, various market and economic-based indicators suggest the election may be much closer than many are expecting.

SUPPORT FOR A BIDEN VICTORY

Various polls show former Vice President Joe Biden comfortably in the lead in the 2020 presidential race, although in some battleground states the race appears to be quickly tightening. Influential states like Ohio and Pennsylvania may even be a coin toss at this point.

Not surprisingly, approval ratings can play a large part in forecasting the overall percentage of the votes in an election. Only two presidents have lost reelections since the Great Depression: George H. W. Bush and Jimmy Carter. Not surprisingly, both had low approval ratings leading up to the elections. If the people don’t approve of the job you’re doing, you may not serve a second term.

Recent Gallup polls suggest that President Donald Trump’s approval rating is 43%. Using a regression of previous elections, this equates to less than half of the two-party vote [Figure 1]. Of course, Trump received less than half of the popular vote in 2016, but he still won the election because he had more than 270 votes in the Electoral College. Still, the polls currently favor Biden, and this appears to be his race to lose.

How well specific “Biden stocks” have done could be another clue that a Biden victory may be around the corner. Our friends at Strategas Research Partners created a basket of stocks likely to benefit from either a Trump or Biden presidency, and the Biden portfolio has done extremely well lately. Areas like green energy and solar have experienced huge moves before this election, while defense companies and financials— considered friendly to Trump—have not performed as well.

Also, recessions have been reelection killers. Since the Great Depression, there have been four recessions within two years of an election, and the incumbent party lost every single time. The 1924 election with President Calvin Coolidge was the last time the incumbent party candidate won when there had been a recession ahead of the election.

CLUES IT MAY BE CLOSER THAN THE POLLS SUGGEST

The majority of Washington insiders we track think Biden has at least a 60% chance of winning this election, with many thinking the odds are much higher. However, there’s a good chance things could be much closer, and here’s why.

  • Gross domestic product (GDP) is set for a huge surge in the third quarter, with the Atlanta Federal Reserve GDPNow estimating a jump of 35.3% when the number is released October 29. That would be the largest quarter-over-quarter increase ever and would bring the average for the previous two quarters to a respectable 2.1%. That’s not bad considering GDP was down more than 31% in the second quarter of 2020. Using regression from previous elections, a 2.1% GDP print comes out to 51.9% of the two-party vote, exactly what President Barack Obama received in 2012 [Figure 2 . Note that the only president who had negative-GDP growth ahead of the election was Carter, who lost his reelection bid in 1980.

    As we mentioned above, if the economy is in a recession before the election, reelection odds decline, while here we are demonstrating that a strong economy right before an election is good. This sums up 2020—things are just really confusing!

  • Stocks are strong. Historically, the stock market is a great predictor of who will be in the White House. In fact, in 20 of the past 23 elections (87%), the S&P 500 Index has accurately predicted who would win. If stocks have been higher the three months before the election, the incumbent party usually has won, and if they were lower, the incumbent party usually lost. Remember 2016 when nearly everyone thought former Secretary of State Hillary Clinton would win? Well, stocks didn’t buy it, as the S&P 500 fell ahead of the election and signaled a change in party. Since August 3, the S&P 500 is up 5.6%, which would support Trump in this election.
  • Incomes are rising. It also turns out that if people are making more money, they tend to reelect presidents. The higher real (inflation-adjusted) per capita disposable income growth has been from January through October of an election year, then the higher the two-party vote an incumbent president has received. This statistic has increased 3.4% so far this year, and a regression analysis suggests this could amount to 57% of the two-party vote based on previous elections. Carter and George H.W. Bush both had weak income growth (less than 1%), and they both lost their reelections, while Presidents Richard Nixon, Lyndon B. Johnson, and Ronald Reagan all saw nice wage growth, and all won comfortably.

    The issue with this analysis for the current election is that the CARES Act included stimulus checks to many Americans, as well as enhanced unemployment insurance, which have inflated incomes despite the high unemployment rate. We would put this signal in the favor of Trump, but with an asterisk next to it.

    The US dollar is weak. A weaker US dollar before the election historically has signaled an incumbentparty victory. Similar to when stocks are higher, a lower dollar tends to occur when things are calm, and in many cases improving. Thus far, we’ve seen a weak dollar ahead of this election, similar to 1988, 2004, and 2012, and in all those cases, the incumbent party won the election.

LPL RESEARCH’S BOTTOM LINE

While Biden may be ahead in the polls, there are several clues that this race could be much closer than many are expecting. This could influence the makeup of Congress as well, where a close race may suggest a greater chance of divided government. Ultimately, we the people determine which signals are right this time around, so get out there and vote!

Click here to download a PDF of this report.

 

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

US Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.

Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.

All index data from FactSet.

Please read the full Midyear Outlook 2020: The Trail to Recovery publication for additional description and disclosure.

This research material has been prepared by LPL Financial LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Guaranteed | Not Bank/Credit Union Deposits or Obligations | May Lose Value

Tracking # 1-05071032 (Exp. 10/21)

2801 Willow Creek Rd, Prescott, AZ 86301

Keith Guther, ChFC
(928) 778-2770
Email: keith.guther@lpl.com

Greg Sheehan, AAMS
(928) 445-4700
Email: greg.sheehan@lpl.com

Securities and advisory services offered through LPL Financial A Registered Investment Advisor. Member FINRA / SIPC
Copyright 2020. All Rights Reserved.

The LPL registered representatives of Guther Financial LLC may only discuss securities or transact business with persons who are residents of AL, AZ, CA, CO, CT, FL, GA, ID, IN, MA, MD, ME, MI, MN, NC, NE, NJ, NY, OH, OR, PA, SC, TX, VA, WA, WV.

No information provided on this site is intended to constitute an offer to sell or a solicitation of an offer to buy shares of any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under securities laws of such jurisdiction.