Market Analysis, November 7, 2024, published with permission from Colin Twiggs.

Why Harris lost - what we got wrong

Professor Alan Lichtman's thirteen keys to the White House are well-researched and usually reliably predict the winning candidate. So what went wrong?

Stocks

Lichtman, a quantitative historian who mathematically analyzes trends in American history, and Vladimir Keilis-Borok, a leading Russian geophysicist specializing in seismic activity prediction, built the model. The two collaborated in applying Keilis-Borok's prediction techniques to liberal-democratic political systems.

They examined data collated from US presidential elections from 1860 to 1980 to identify factors predictive of election outcomes. Lichtman concluded that election campaigns do not sway US voters, who instead vote according to how well the president has performed in office. He noted that even if the president did not seek re-election, his successes and failures would affect the prospects for the nominee from his party.

The Thirteen Keys

From Wikipedia:

#	Name	Description
1	Party mandate	After the midterm elections, the incumbent party holds more seats in the US House of Representatives than after the previous midterm elections.
2	No primary contest	There is no serious contest for the incumbent party nomination.
3	Incumbent seeking re-election	The incumbent party candidate is the sitting president.
4	No third party	There is no significant third-party or independent campaign.
5	Strong short-term economy	The economy is not in recession during the election campaign.
6	Strong long-term economy	Real per capita economic growth during the term equals or exceeds mean growth during the previous two terms.
7	Major policy change	The incumbent administration effects major changes in national policy.
8	No social unrest	There is no sustained social unrest during the term.
9	No scandal	The incumbent administration is untainted by major scandal.
10	No foreign or military failure	The incumbent administration suffers no major failure in foreign or military affairs.
11	Major foreign or military success	The incumbent administration achieves a major success in foreign or military affairs.
12	Charismatic incumbent	The incumbent party candidate is charismatic or a national hero.
13	Uncharismatic challenger	The challenging party candidate is not charismatic or a national hero.

Vice President Harris showed character in taking the fight to Donald Trump, winning the debate, and even venturing into the lion's den for a hostile interview with Bret Baier at Fox when Trump refused a second debate. However, she had no chance. Lichtman is right: US voters are not swayed by election campaigns; instead, they vote according to how well they perceive the incumbent president performed in office.

This can be summed up in the index of current economic conditions from the University of Michigan. Perceptions of current economic conditions are lower than during the 2020 pandemic, matching the lows at the depths of the 2008 global financial crisis.

No incumbent president, nor his party's successor, was ever going to survive that—no matter how good the economic soft landing looked on paper. Real GDP grew at an annualized rate of 2.8% in the third quarter despite QT by the Fed and no rate cuts before September 18.

Voters were never going to forgive the Biden administration for presiding over the 2021 surge in inflation, even if they were not the cause. They still feel the pain of high prices and blamed Biden for their predicament.

It doesn't matter that the Fed and Biden administration have skillfully managed to tame inflation without crashing the economy—a rare feat. Households are still suffering from high prices, even if the rate of change has slowed.

The 13 Keys model is still helpful in predicting future election results. However, Professor Lichtman should consider revising keys 5 and 6 to focus on perceptions of current economic conditions rather than on whether the economy is in recession and the real GDP per capita growth rate over the preceding four years. Unfortunately, UOM data only goes back to 1960, not 150 years.

Conclusion

It pays to approach the results of any model with a healthy skepticism, no matter how well it has performed in the past. The future is never a perfect reflection of the past. It doesn't repeat, but it rhymes. Events like the COVID-19 pandemic and Russia's invasion of Ukraine are only likely to occur every fifty years. For the two to coincide is highly unlikely and difficult to model.

What we got right was to underweight long-term Treasuries and corporate bonds, investing surplus funds in short-term instruments. Long-term bond funds like TLT have fallen steeply, and a further decline is expected.

The stock market rally has lifted most sectors, and our Bull-Bear indicator has kept us 80% invested in stocks—for now.

We are overweight gold, which is experiencing a post-election correction, signaled by gold ETFs like GLD breaking below their long-term rising trendline.

The correction has not dented our bullish long-term outlook for gold. We expect GLD to respect support at 240 and then resume its uptrend.

"It’s the economy, stupid." ~ James Carville, strategist in Bill Clinton's successful 1992 U.S. presidential campaign.

Acknowledgments

• University of Michigan: Survey of Consumers
• Wikipedia: The Keys to the White House