All Things (-) Correlated: S&P500 and the Midterm Elections

Ask almost anyone if they thought a two-year bull market in stocks would help a new President during his first midterm Congressional elections and the answer would be a resounding YES!.  That is why we were so surprised to discover such a strong negative relationship between the two-year return on S&P 500 from the day the President’s election to the eve of the midterm Congressional elections and the number of seats picked up in the House.

There have only been three post-war Presidents where the S&P5oo had a negative return.  Bush 43 was the only President to pick-up seats even though the S&P500 was down 36.6 percent as the “fear trade” dominated the election cycle after 9/11.   The other two,  Nixon and Carter suffered relatively minor losses in the midterms.

A simple regression shows that, on average, every newly elected President  since Ike loses .6 seats for every one percent increase in the S&P500 (the holding period is from the Presidential election night to the eve of the Congressional election).   The intercept of the regression in -20, which means that if the S&P500 returns zero percent, the President loses 20 seats in the House.  See the trendline in the graph.

The regression analysis is kind of a silly exercise as there many other factors that drive midterm elections, which we will look at in a later post.   Nevertheless, even if the correlation is spurious,  we find the results counterintuitive and very interesting.  The stock market just doesn’t matter!

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1 Response to All Things (-) Correlated: S&P500 and the Midterm Elections

  1. Pingback: Confirmation Bias Confirmed! | Global Macro Monitor

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