Low volatility this summer may be an indication that stocks markets are beginning to price in a win for Hillary Clinton in November, according to Burt White of LPL.
The chief investment officer of LPL Financial wrote in a weekly commentary note that election years have historically been good for markets, with the greatest levels of volatility coming in the middle and late summer months prior to an election. Volatility subsides as markets learn more about candidates and begin pricing in a winner, he wrote.
The “relative calm” in the markets over the past few months “may partly reflect that the market is increasingly pricing in greater certainty that would come with a Hillary Clinton victory, as her support has climbed in the polls.”
The election and Clinton’s prospects in it are only part of the reduced volatility story. White noted that improving economic conditions have clearly “played a key role” in the rising stock market over the past six months. Furthermore, it’s not clear what either candidate could get through Congress, he wrote, or who will have the majority in either the House or the Senate next year.
“We can speculate that recent stock market gains partly reflect greater certainty under a Clinton administration. But polls can be wrong (case in point: Brexit),” White wrote. “It’s possible that the market’s strength has little to do with the election. So perhaps a better question to ask is: Do strong stock markets predict elections?”
Since 1928, 82% of elections have been correctly predicted by an increase (which predicts a win for the incumbent) or a decrease (predicting the challenger will prevail) in the stock market over the three months prior to the election, according to White.
There are some notable divergences from that theory. In 1932, when the market was up 15.4% in the August through October period, the race went to the challenger, Franklin D. Roosevelt. In 1956, Dwight D. Eisenhower won despite the markets being down 7.7%. Twelve years later, the election went to Richard Nixon, with a 5.8% increase in the market. In 1980, Ronald Reagan won following a 4.8% increase in the market in the three-month pre-election period.
White added that for elections following a two-term president, an increase or decrease has correctly predicted the election going to the incumbent or challenging party 100% of the time, “but granted, this covers a limited number of occurrences,” including Roosevelt’s election to his third and fourth terms.