Vice President Kamala Harris is less likely to win the US presidential election than he was two weeks ago, according to a model that uses year-to-date stock market performance to predict the likelihood of a victory for the incumbent political party.
Nevertheless, that model still predicts that Harris, the Democratic presidential candidate, is likely to win the presidency on Tuesday — giving her a 70% chance of victory. The reason the odds of Harris winning on November 1 were lower than the 72% on October 17, when I last wrote about this model, is that the Dow Jones Industrial Average DJIA has fallen in the meantime.
Must know: The American elections don’t have to be scary. History shows that this is the way to trade it, Citi says.
This stock market forecasting model is not complicated. It takes advantage of the historical trend that the probability of an election victory for the incumbent political party reflects the performance of the Dow Jones this year. The model’s track record is statistically highly significant: at the 99% level.
Take a look at the graph above. It shows the trend line that best fits the historical data up to 1900. Is the model watertight? Of course not. And keep in mind that a 70% probability is not 100%. Furthermore, even if the model had a perfect track record, there is no guarantee that the future will be like the past.
That said, my simple model has a better track record than most of the models Wall Street uses, many if not most of which lack statistical validity. The model makes theoretical sense: the stock market is forward-looking, so a rising market means most investors are optimistic about the prospects for the economy in the coming months. Numerous studies have shown that people tend to vote with their wallets.
I received a lot of angry emails in response to my mid-October column, in which many of you claimed that a Harris presidency would be disastrous for the economy. I have no idea myself. But I do know that if these dire predictions were correct, we would expect the stock market to plummet as Harris’s chances of winning increase. That has not been the case, as I indicated in a column earlier this week. The stock market has risen on average in the weeks since July when the Harris contract rose on PredictIt.org.
