Presidential poll numbers and the stock market are joined at the hip

Election offers clear economic choice: David Malpass
Election offers clear economic choice: David Malpass

One way to tell which way the stock market is heading may be just to watch how the presidential polling goes.

Should Donald Trump shake off his recent slump and pull ahead in the race, the market will fall, according to one analysis of recent trends. Conversely, then, should Hillary Clinton continue to lead, that would push the market higher if the findings hold true.

Macroeconomic Advisers set out to study the correlation between stock prices and which candidate was leading in the polls. It used as its benchmark Nate Silver's FiveThirtyEight tracking, which runs election simulations based on polls and economic conditions.

The firm then translated those terms into the trend of the equity risk premium, or the extra return on stocks that investors demand over a low-risk investment like bonds.

As of Thursday afternoon, the FiveThirtyEight "polls-plus" measure of who would win today gives Clinton a 74.8 percent chance of victory to Trump's 25.2 percent, the biggest gap since Aug. 25. However, the Macroeconomic Advisers measure was taken from the Sept. 30 close, which showed Clinton with a 64 percent chance.

The nuts and bolts breakdown for technical analysts is that if Clinton holds her lead to Election Day, the equity risk premium will fall from 3.55 percent to 3.45 percent, equating to a 4 percent rally. If Trump's fortunes turn around, the premium would rise to 3.73 percent, correlating with a 7 percent decline. (A higher risk premium indicates anticipation of more market volatility.)

Democratic presidential nominee former Secreatry of State Hillary Clinton greets supporters during a campaign rally at Goodyear Hall and Theatre on October 3, 2016 in Akron, Ohio.
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"We've been tracking the correlation between the possible election outcomes and movements in the part of the stock market that's associated with risk appetite," said Joel Prakken, senior managing director of Macroeconomic Advisers. "Looking for the last several months at the daily variations ... there's been an inverse correlation between the probability that Trump wins the election and stock prices."

The findings aren't terribly surprising or unusual. A New York Times examination of what might happen to the market during election season, using different methodology, found a Trump victory would trigger a 10 to 12 percent drop in the market.

It's also consistent with historical patterns and isn't peculiar to the Clinton-Trump race.

Since the end of the World War II, when the market fell in the three-month period heading into the election, the incumbent party lost 86 percent of the time, according to Sam Stovall, chief equity strategist at CFRA Research.

Getting at why is a little trickier. Trump, after all, is a businessman who has dabbled in the market, on top of representing a Republican Party that is supposed to be friendlier to business interests and Wall Street culture.

However, Prakken suspects the market is leery of the changes Trump would bring, as opposed to the stay-the-course posture that's more likely under a Clinton administration.

"You have a candidate who's a little erratic, and policy prescriptions that are at odds with long-running Republican orthodoxy," Prakken said. "Some analysts suggest those policies would be quite detrimental to the economy."

Indeed, Wall Street is betting on Clinton. The Democratic nominee has pulled in a whopping $58.6 million from finance-related contributors, compared to Trump's $557,480, according to the Center for Responsive Politics.