BYRON WIEN: Stock markets can predict US elections -- and this one pointing to a Clinton victory

If you want to get a feel of how the US presidential election will play out, Blackstone’s vice chairman Byron Wien has a suggestion: look at stocks.

The incumbent party usually wins if the stock market is doing well, Wien said in a webcast Thursday. Conversely, if the stock market is doing poorly, the challenger usually wins.

“There’s a correlation between the outcome of the election and the market,” Wien said, citing the polling before recent results on Florida and Ohio. “Hillary had at least 70% probability of winning with the market doing relatively well.”

Wien, it should be noted, has donated to the Clinton campaign — as well as those of other Democratic candidates in the past. So that 70% figure might be taken with a grain of salt.

But he’s not the only one to observe the correlation between markets and election outcomes.

Wien’s theory is based on the historical performance of S&P 500 three months before the presidential election. Since the 1920s, the incumbent party usually wins when market returns are high. However, Wien cautioned that it doesn’t work out perfectly, as shown in the blips in 1956, 1968 and 1980.

When the country prospers during the election year, it is likely to favour the incumbent candidate as voters feel good about current and future prospects. When the economy is in a bad shape, voters are likely to seek change and punish the incumbent or their political party.
Wien’s prediction method echoes that of Daniel Clifton at Strategas Research Partners, who saw the
S&P 500 has correctly “predicted” the winner in 19 of the past 22 presidential elections.

Of course this doesn’t mean strong markets direct the outcome of the election. Instead it may be that past market gains have reflected the overall economic trend, which in turn influenced voters’ decisions. There’s many reasons to wonder if that’s true this time around – with stock gains driven by many factors — like low interest rates — that actually indicate economic weakness.

Still, Wien’s bullishness on Clinton’s chances is only increasing.
In his 10 surprises for the year, Wien had assigned a better than 50% chance of Hillary Clinton winning and Democrats taking back the US Senate.

“There’s only a five point spread between Trump and Clinton, and in my view that’s narrowing and enough to assure Clinton’s victory,” Wien said, citing presidential polling trends from July 2015 to July this year.

Not surprisingly, he thinks Obama’s favorability and Hispanic voters play important roles in the upcoming election.

“If Hillary somehow wins the landslide, there’re six seats in play. They could lose the senate in the landslide Democratic victory, but right now the election looks much closer than that,” Wien said.

NOW WATCH: Everyday phrases that even smart people say incorrectly

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.