The incumbent party has historically won if stocks rally into an election. Here's why this time could be different.

A stock market signal closely followed by Wall Street pros suggests Kamala Harris will win the Presidential election next week, but commentators warn that the historically accurate signal could fail this time.

 

History shows that when the S&P 500 has been higher in the three months leading up to the election, the incumbent party has won 80% of the time.

 

On the flipside, when the S&P 500 has been lower in the three months leading up to the election, the opposing party has won the election 89% of the time.

 

It's been a highly accurate signal in every election since 1928, and assuming the index doesn't erase its 8% gain since August in a day, commentators have said there's a good chance Kamala Harris will win.

 

Yet, market experts speaking with Business Insider note that the backdrop for both the market and the political landscape is highly unique, mirroring one of the only years that the signal has failed to point to the outcome of the vote.

 

Sam Stovall of CFRA Research said there are some uncanny similarities between today's election cycle and 1968, a year when the stock market election signal failed.

 

In 1968, former President Lyndon Johnson chose not to run for reelection and was replaced at the top of the ticket by Vice President Hubert Humphrey. Similarly, President Joe Biden dropped out and was replaced by his Vice President.

 

Also in 1968, the Federal Reserve cut interest rates between July 31 and October 31, which ultimately did not help the incumbent party. The Fed cut interest rates by 50 basis points last month for the first time since 2020.

 

Stovall said the final similarity is that Democrats in 1968 faced a restless populace clamoring for change. Back then, the issue was the unpopular Vietnam War. Now, rising prices and immigration issues could hurt Democrats' chances.

 

"Therefore, like 1968, the market's advance may be a reflection of 'replacement relief' not 'reelection," Stovall told Business Insider.

 

Others on Wall Street say the market in 2024 has distinct factors driving the gains — notably, artificial intelligence — that preclude it from hinting at political outcomes.

 

"We do not think that the market is a good predictor of the election outcome as the market has become more concentrated and the AI boom is distorting equity returns," Jay Hatfield, CEO at Infrastructure Capital Advisors told Business Insider.

 

What's more, there may be more accurate indicators than the moves of the broader S&P 500, and those indicators have been pointing to a Trump victory.

 

Assets tied to the "Trump trade" have gained in recent months, with bitcoin, shares of Trump Media and Technology Group, and the dollar all rallying on an expected boost from a second Trump presidency. Billionaire investor Stanley Druckenmiller told Bloomberg last month that the market is "very convinced Trump is going to win."

 

A notable miss for the signal in recent history is the 2020 election. That year, the S&P 500 rose 2.3% leading up to the November vote, suggesting a Trump win, but Biden ultimately won.