In politics, the old saying "It's the economy, stupid" usually applies in election years, especially presidential elections. In fact, according to analysis reported by USA Today, the performance of the stock market and economy has predicted the winner of all but three presidential elections since 1928, and every one since 1984. The trend holds that in years when the stock market rises in the three months leading up to Election Day, the incumbent party wins. When the stock market falls in that period, the incumbent party loses.
But this is the chaotic year of 2020, when conventional wisdom and trends may not hold up. The stock market plunged 34% in the spring at the onset of the coronavirus pandemic, but has since recovered nearly all of those losses. Unemployment skyrocketed and the economy contracted in the early months of the pandemic, but those numbers have also recovered somewhat, albeit more slowly than the markets.
All of this has somewhat confounded economists heading into the election. "The stock market had been rising until recently thinking the economy was going to recover nicely, but since there's been no new (stimulus) plan that's when the market started getting volatile," says Jordan Goodman, America's Money Answers Man. "And so there's just an awful lot of uncertainty leading into this election."
When it comes to economic policy, there is one favored candidate. "In general, the stock market does like lower taxes and more business friendly (regulatory policy), which certainly President Trump has brought," says Goodman. "And Joe Biden would raise corporate taxes, he'd raise individual taxes, and he'd raise capital gains taxes."
Ultimately, Goodman believes investors this year may be more focused on the Senate than the White House. "Whether the Senate stays in Republican hands or becomes a Democratic Senate, that's where the fulcrum of power really is," he says. "Because if Biden gets elected and there's still a Republican Senate, he'll get nothing done."