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CNN
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Clues about how this election cliffhanger will end may be hiding in an unlikely place: your 401(k).

As people try to make sense of the latest swings in the prediction markets and dramatic shifts in the stock price of former President Donald Trump’s social media company, there is a much simpler forecaster with a surprisingly strong track record.

It finds that the party in the White House tends to stay in power when the US stock market rises in the run-up to presidential elections.

According to Sam Stovall of CFRA Research, who came up with this election forecaster, the incumbent party has won the race for the White House in all but two elections since 1944 as the S&P 500 rallied between late July and Halloween.

This indicator accurately predicted the winner 82% of the time.

That’s why Trump, who follows the stock market closely and has been obsessed with it as president, should be nervous about the recent trend on Wall Street.

The S&P 500 rose 3.3% between the end of July and the end of October.

“When the market rises, the incumbent party usually wins. If the market goes down, the incumbent is replaced,” Stovall told CNN in a telephone interview on Monday.

Of course, this indicator has not always been accurate. And it includes a relatively small sample size. There have been only twenty presidential races since 1944.

Yet there is a certain logic to all this.

If markets rise in the run-up to the election, it means investors are not worried about an impending recession. And a recession would be a reason for voters to throw out the party in power.

“The market anticipates. If the market falls, it is because investors expect higher rates or a recession – both of which would have a negative impact on voters,” Stovall said.

That’s what happened in 2008.

The S&P 500 plunged nearly 24% between late July and late October of that year, a period that included the bankruptcy of Lehman Brothers, the implosion of AIG and the government takeover of mortgage giants Fannie Mae and Freddie Mac.

With unemployment and bankruptcies skyrocketing, voters decided it was time for a change. The Republicans were voted out of the White House in favor of Democrat Barack Obama.

The market indicator was right in 2016 and 2020

Vice President Kamala Harris should be relieved that the market has posted solid gains.

According to Stovall, when the S&P 500 falls between the end of July and the end of October, the incumbent has been replaced 89% of the time. The only misreading was in 1956 when Dwight Eisenhower defeated Adlai Stevenson.

This indicator was also true regarding the previous two Trump races.

In 2016, the S&P 500 fell 2.2% in the run-up to Trump’s matchup with Democratic candidate Hillary Clinton. Clinton, who served as secretary of state in the Obama administration, lost to Trump despite holding large leads in most polls in October.

And in 2020, the S&P 500 fell just 0.04% in the final months before the election. Trump ultimately lost to Joe Biden.

It’s worth noting that this stock market forecaster has also been wrong in the past.

In 1968, an election year that bore some important similarities to 2024, the S&P 500 rose nearly 6% in the final months before the election. And yet Hubert Humphrey, the candidate for the incumbent Democratic Party, ultimately lost to Richard Nixon.

Stovall notes that just like this year, the 1968 Democratic Convention was held in Chicago and that Humphrey, like Harris, was an incumbent vice president who was nominated after the incumbent president suspended their campaign. Likewise, voters in 1968 were frustrated with the establishment.

“The Democrats faced major headwinds in 1968 with Vietnam and today with the war on inflation and immigration,” Stovall said.

In 1980, Jimmy Carter lost his re-election bid, even though the market was significantly higher in the months leading up to the election. Carter was hurt by high inflation and the Iran hostage crisis.

This year’s election boom is historic.

The S&P 500 ended October up 19.6% for the year. That’s the best performance for an election year through October since 1936, according to Bespoke Investment Group.

There are, of course, several reasons why markets are rising today.

Part of that has to do with optimism about a likely soft landing for the US economy and the Federal Reserve’s decision to aggressively cut rates. Investors are still excited about AI boom that sent tech stocks soaring. And some market strategists have pointed to hopes that Trump wins the White House and enacts tax cuts that would boost corporate profits.

Yet there is another market indicator that offers reason for hope for the Harris camp.

It finds that a gain for the Dow Jones Industrial Average during the 11-week period before Election Day “correctly predicted” an incumbent victory 12 out of 13 times since 1928, according to Doug Ramsey, chief investment officer of The Leuthold. Group. And a drop in the Dow Jones accurately predicted a loss for the incumbent party ten times out of eleven. That equates to a 92% success rate over that period.

“While we are concerned about the narrower ranges in which many of these forecasts prevailed,” Ramsey recently wrote in a note to clients, noting that in some cases the Dow Jones rose or fell less than one percentage point.

It won’t be clear what this indicator will predict until the close of trading on Election Day. But through Monday’s close, the Dow Jones has risen 2.4% since August 20, 11 weeks before Election Day.

“The disadvantage of this market-based election rule is that one must wait until the close of trading on November 5 for the final decision,” Ramsey wrote. “Fortunately, the stock market will usually lend a hand as the elections approach.