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Donald Trump has 87% chance of winning the election, stock market researcher says

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President Donald Trump has a very good chance of winning the 2020 presidential election against Joe Biden, if a more than 200-year overview of the stock market is to be believed.

That's according to research from the Socionomic Institute, a group that has long used the stock market to predict elections and economic and cultural trends. 

The research, going back to George Washington, found 16 times in U.S. history when an incumbent president ran for reelection and the stock market was up more than 20% in the preceding three years. In 14 of those 16 times, the incumbent won reelection, giving a success rate of 87%. If the trend holds, Mr. Trump could be No. 15.

The two times it didn't work out, for reference, were George H.W. Bush, who lost to Bill Clinton in 1992 even though the stock market was up 38% in the preceding three years, and John Adams, who didn't win his reelection bid in 1800, despite the fact that the value of capital in U.S. chartered banks had risen by 30% in the previous 5 years. (At the time, federally chartered banks were the only publicly traded stocks in the young republic.)

"The stock market is an indicator of social mood," said Matthew Lampert, who is the director of research of the group. "Historically, a more positive trend in the market and social mood is associated with a win for the incumbent."

That gives Mr. Trump a pretty clear historical edge. But there are some huge caveats to consider before concluding that he will have another four years in the White House. 

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First, the stock market as we know it and measure it today, doesn't go back all the way to George Washington. While public investments traded as early as 1792 in the U.S., initially they were mostly bonds or banks backed by the government. The Dow Jones industrial average wasn't published until 1896. Return data before that had to be recreated with the help of another research organization.

Second, while the stock market does at times match the "social mood" of the country, that seems far from the case right now. A recent Gallup poll found that only 14% of Americans were happy with the direction of the country, despite the market being up 32% in the past three years.

Indeed, a number of top stock market strategists have recently said they believe the recent increase in the stock market is signaling a win for Joe Biden, not Mr. Trump. Goldman Sachs, for instance, told clients in a research note last week that the odds of Biden winning the presidency and Democrats gaining a majority in the Senate was roughly 65%. Analysts with the investment bank pointed out that stock prices have been rising since September, coinciding with political polls tilting increasingly toward Biden.

What's more, the Socionomics researchers found that the market is more reliable in predicting elections when the gains are across a number of sectors, and not concentrated in a single sector, like tech, as they are now. For instance, when George H.W. Bush lost, the average stock in the broad market was actually down 11% during the prior three years, even though the Dow, which only tracks 30 major stocks, was up in the same time.

The same is true of the market under Mr. Trump. While the Dow and the S&P 500, each of which tracks a fraction of the stock market, are both up, the average price of all publicly traded stocks has fallen 10% in the past three years.

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The Socionomic Institute itself is headed by market strategist Robert Prechter, who is credited with calling the bull market of the 1980s, but has been less successful since. In 2010, Prechter told the New York Times the Dow was poised to have a plunge of epic proportions, falling from its near 10,000 level at the time to a mere 1,000 over the next six years. Instead, by 2016, the Dow had nearly doubled, rising to just over 18,000.

Still, Socionomics' Lampert says the stock market numbers are in Mr. Trump's favor. And the stock market has proven to be a very good indicator of where the economy is headed.

"Donald Trump is a controversial figure, and 2020 is far from a typical election year," said Lampert. "Every election has dozens of reasons why it might be different, but the history has been what it's been. We'll see if it holds this time."

Ryan Detrick, LPL Financial's chief market strategist, recently came to a similar conclusion. In a note to clients, he wrote that the performance of the stock market in the three months leading up to the election has been a pretty good predictor of the outcome of the election, and the market since July is up.

"We think it's going to be a lot closer than the polls may suggest right now, similar to what we saw in 2016," Detrick said.

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