Who will win the US presidential election? None of us have a crystal ball but the “misery index” appears to have been remarkably accurate in forecasting the result.
What is the misery index?
The misery index is an unofficial economic indicator - a basic gauge of the health of an economy - calculated by adding the seasonally adjusted unemployment rate to the annual inflation rate.
The index assumes that rising unemployment and inflation influence or affect the prevailing mood of a nation. Rising unemployment when combined with rising inflation has a major psychological, if not actual, impact on the average wage earner, so the theory goes.
How does it help predict the US presidential election?
When a misery index falls over the term of a presidency, it bodes well for the incumbent party, and particularly when the electorate experiences an economic feel-good factor towards the end of a term.
According to analysis by Bloomberg, the misery index has correctly forecast the winner of 11 presidential elections over 50 years, based on a fall in the index toward the end of a presidency.
There are only two occasions during that period where the index has failed to forecast the correct result.
2 November 1976 - Jimmy Carter defeats Gerald Ford
Gerald Ford replaced Richard Nixon in 1974, following the Watergate scandal. The theory would suggest a victory for him after a sharp fall in the index during his two years (see the chart below). But the election was clouded by the scandal. Victory was handed to Jimmy Carter.
3 November 1992 - Bill Clinton defeats George Bush Senior
The recession of 1990-91 had just ended but a late improvement in economic conditions was not enough to save George Bush Senior from defeat to Democrat nominee Bill Clinton.
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For professional advisers only. This material is not suitable for retail clients. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Schroders has expressed its own views and these may change. The data contained in this document has been sourced by Schroders and should be independently verified before further publication or use.
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Issued in March 2016 by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 4191730 England. Authorised and regulated by the Financial Conduct Authority.