Trump Has Real Reasons To Fixate Over The Stock Market

[Guest]

Study finds a measurable tie between share returns and voting    No president in modern history has followed the stock market more obsessively as a barometer of success than Donald Trump. You can see it in the dozens of tweets he’s sent referencing the Dow Jones Industrial Average, in the way every record is celebrated while lurches are pinned on the Democrats. Turns out, he might actually be onto something.

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https://www.bloomberg.com/news/articles/2019-10-13/donald-trump-has-real-reasons-to-fixate-over-the-stock-market

While it’s long been accepted that prosperity influences elections, the role of the market itself in picking winners has started to get more attention in expert circles. A few keen observers noticed that in 2016, stock returns turned negative a few days before Hillary Clinton lost. That’s been a bad sign for incumbents for decades. Now, new academic research finds that the market has a measurable influence on how people who own shares vote -- potentially a big one. The study, which compared electoral preferences with levels of dividend income, suggests that had stocks rallied instead of plunging in 2008, John McCain may have won key states like Florida and Ohio.

 

 

The authors, from Rice University and University of Pittsburgh, stop short of saying equity returns determine elections -- after all, incumbent Democrats were booted out in 2000 after one of the biggest rallies ever. But there’s reason to think stock performance affects decisions at the margin, and in certain circumstances could turn the tide. “The story is, if you’ve got a lot of money invested in the stock market, and the stock market has been going up, then you’re going to support that incumbent party, because that’s good for you personally,” said Alan Crane, a finance professor at Rice. “You have an opportunity for politicians to cater through this particular channel.”

While the observation that markets affect candidate prospects sounds obvious, it’s a phenomenon researchers have struggled to quantify, partly because candidates also affect markets and everything gets hard to disentangle. The possibility another variable holds sway over both -- the economy, for one -- also complicates the calculus. The study tried to boil out the impact of equity returns on voters based on how involved they were with the market. To test this, the authors divided counties up into tenths based on estimated levels of stock ownership. After four years in which shares gained, preferences for incumbents were greater in the bracket with the highest ownership. They steadily decreased as holdings diminished.

“From an academic standpoint, there is a generally accepted principle: a good economy is good for the incumbent. The problem is, it’s very hard to show,” said Crane, who wrote the paper with Pittsburgh professors Andrew Koch and Leming Lin. “What we’re trying to do in this paper is nail that down. Say look, the stock market does have this causal effect going in that direction, and we can identify that.” Returns over a full term, rather than any individual year, have the biggest influence on voting habits, they found. So while everyone knows stocks are up a ton under Trump, a more relevant question is whether they’ll be up when it counts: late next year.

To be sure, it would take a lot to wipe out the rally that has occurred under this president -- a drop of nearly 30%. Still, every swoon and piece of disappointing data are an unfriendly reminder of this cycle’s age -- at more than 10 years the longest ever recorded. Moreover, indicators like the Treasury yield curve could be read to suggest the S&P 500 is on the cusp of a peak. “The benefit of looking to the stock market as a prediction is, it gets away from the emotional aspect of what a particular candidate is offering,” Michael Ball, managing director of Denver-based Weatherstone Capital Management Inc., said by phone. “You have basically investors putting their money where the mouth is in terms of the economic reality.”

Right now, while prophesies are everywhere, all that can be said for sure is that major benchmarks are sitting near records after rallying nearly 40% under Trump. While a lot could change in 13 months, right now, stocks, in a basic sense, are on the president’s side. Whether that sticks remains to be seen. Besides the overall performance in indexes, a few signals are worth noting. The yield curve may suggest the economy is in bigger trouble than it seems. Moves in specific stocks or industries whose fortunes are somehow tied to the president, is another. In both cases, the market’s read has been a bit less encouraging for Trump in recent months.

Partly fueled by the trade war, recession fears abound, with bond yields tumbling toward record lows while equity investors are seeking shelter in low-volatility stocks. It’s in stark contrast with Trump’s first year, when his victory, followed by deregulation and tax cuts, unleashed animal spirits, sending the S&P 500 to 15 straight months of positive returns including dividends. In one corner of the market, doubts over his re-election are creeping up. It’s health-care stocks, a political battleground because some Democratic presidential candidates favor a “Medicare-for-All” government-run system. A benchmark for America’s largest managed-care companies has plunged into a correction for the second time in 2019, coinciding with a rise in Democratic candidate Elizabeth Warren’s popularity.

While jitters about rising medical claims are pressuring the sector, they don’t justify this big a fall, according to David Windley, an analyst at Jefferies. “Maybe the market is saying they know President Trump is not getting re-elected,” he said in a recent interview.

While no cycle is the same, past patterns in relation to a widely followed recession signal -- a curve inversion where two-year Treasury yields sit above 10-year, may point to a market peak and an economic downturn close to next year’s election. Since 1956, such bond market warnings preceded a S&P 500 top by seven months and a recession by 15 months, on average, data compiled by Bank of America showed. Yields inverted in August for the first time in more than a decade. Should a similar path be followed, stocks may face some trouble starting in March 2020 and a recession in November.

“The big question is, are we looking for a signal, or are we looking for a cause? I think the market is causal right now,” said Jim Bianco, president and founder of Bianco Research. “It will move in a way, either down bad for Trump, or up good for Trump. That will turn voters.”

Edited October 13, 2019 by Guest