Fears over a potential recession and plunging stock markets fueled by the coronavirus pandemic could threaten President Trump’s efforts to secure a second term.
As it turns out, the U.S. economy has an impressive track record of predicting the next president, if history is any indication.
The U.S. economy predicted the winner of 16 of the previous 18 elections where a sitting president was up for re-election, according to LPL Financial. You have to reach back to Calvin Coolidge in 1924 to find the last time the economy was wrong regarding the re-election of a president.
“Incredibly, the last 11 times there wasn’t a recession within two years of a re-election, the sitting president won,” Ryan Detrick, senior market strategist at LPL Financial, said in a note. “Compare that to the seven times there was a recession, and the incumbent president didn’t get re-elected five of those times.”
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To be sure, the economy doesn’t appear to be in a recession. In fact, the U.S. economy headed into 2020 on a solid footing, driven by strong jobs growth, robust consumer spending and a firming housing market.
But stocks ended the longest-ever bull market Thursday as disruptions due to the coronavirus have rippled through the global economy. Bear markets and recessions typically go together, but not always. Stocks have dropped 37% on average in bear markets during a recession, while losing 24% when a downturn is avoided, according to Detrick.
Still, warning signs of a U.S. economic slowdown have emerged, raising fears the decade-long economic expansion could be on its last legs.
That has pushed economists to lower their growth estimates for 2020. Oxford Economics plans to cut its U.S. GDP growth outlook for the year to 0.8%, below its previous forecast of 1.3%, citing the stress in financial markets and plunging oil prices.
“The economy is flirting with a recession in the first half of the year,” says Gregory Daco, chief U.S. economist at Oxford Economics.
Before the outbreak, the firm projected a 25% chance that the U.S. economy would suffer a downturn. Now the odds of a recession are closer to 50% because economic activity is expected to contract sharply in the second quarter due to the global supply chain constraints from the virus, Daco says.
U.S. economic activity is poised to gradually rebound in the second half of the year from potential fiscal policy measures from the government, low-interest rates and cheaper gasoline prices. But investors are still anxiously awaiting details from the Trump administration on potential aid for the economy.
“The big question now is how quickly can this be contained?,” Detrick says. “A coordinated fiscal policy effort is one key part to stabilizing things.”
Trump has touted a strong economy and a booming stock market as a key focus for his reelection campaign. Still, the stock market’s gains since Election Day 2016 have been cut sharply recently, with the S&P 500 up roughly 16% since Nov. 8, 2016. That’s down from nearly 60% from Election Day to when the index hit a record on Feb. 19.
More times than not, an incumbent is granted a second term unless the economy slumps into a recession or the stock market has fallen into a correction or bear market, according to Sam Stovall, chief investment strategist at financial-research company CFRA.
Since World War II, only two presidents have run for reelection during the same year as a recession: Democrats Harry Truman and Jimmy Carter. Truman won, helped by the fact that the economy didn’t fall into a recession until November 1948, the same month as the election.
Carter, meanwhile, lost his re-election bid in November 1980 to Republican Ronald Reagan after the economy slumped into a six-month recession in January.
“Part of the reason the market is going down is that investors were hoping that the president would be decisive, not dismissive,” Stovall says. “With the prospect of a recession and a bear market, this could be the president’s undoing. He might be joining Jimmy Carter as a one-term president.”