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What You Need to Know About the Market and Mid-term Elections

Mid-term elections introduce a measure of uncertainty into the markets. Will the President’s agenda be frustrated by the opposition party gaining control of one or both of the legislative chambers?

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What You Need to Know About the Market and Mid-term Elections

What You Need to Know About the Market and Mid-term Elections

The markets have undergone wide swings in 2018, pulled down by trade war fears and buoyed by stellar corporate earnings and strong economic growth. If history is any guide, expect this year’s mid-term elections to impact stocks. In fact, we may already be seeing the effects of the market and mid-term elections.

Mid-term elections introduce a measure of uncertainty into the markets: Will the majority party hold power in the House and the Senate? Will the President’s agenda be frustrated by the opposition party gaining control of one or both of the legislative chambers?

This uncertainty has historically led to increased price volatility and, since 1962, the S&P 500 has ended the first three quarters in a mid-term election year flat or slightly down.1

For instance, in the last mid-term election year of 2014, stocks slid 7.4 percent in the first nine months, while a more pronounced decline (-16.0 percent) was experienced in 2010.2

Volatility has certainly jumped in 2018, though year-to-date returns through July have been modestly positive for the S&P 500 and strong for the technology-heavy NASDAQ Composite.

Based on historical experience, past price retreats have presented an excellent buying opportunity with an average bounce of 7.5 percent in the fourth quarter and an average jump of 31 percent 12 months later from the trough of the market in that mid-term election year.3

Beware the Averages

Averages can be as misleading as they can be instructive. Looking at the S&P 500 from 1933 to 2016, the average returns varied widely based on the election outcome.

For our purposes, we’ll focus only on historical instances in which there was a sitting Republican in the White House since that’s where we find ourselves today.

The average annual return for the S&P 500 in years in which Republicans came out of the mid-term election with majorities in the House and Senate was a robust 15.1 percent, though that slipped considerably to an average annual gain of 10.8 percent following a mid-term election where Republicans held a majority in only one chamber of Congress (either House or Senate), and sliding to a 4.9 percent average annual increase when the Democrats captured both chambers of Congress following a mid-term election.4

Of course, there are many other factors that affect the stock market’s direction, so no one can be sure that lifting the weight of election uncertainty in the fourth quarter will result in a repeat of an otherwise optimistic historical pattern.

Sources:

  1. https://www08.wellsfargomedia.com/assets/pdf/personal/investing/investment-institute/ISR_043018_ADA.pdf
  2. https://www08.wellsfargomedia.com/assets/pdf/personal/investing/investment-institute/ISR_043018_ADA.pdf
  3. https://www08.wellsfargomedia.com/assets/pdf/personal/investing/investment-institute/ISR_043018_ADA.pdf
  4. https://www08.wellsfargomedia.com/assets/pdf/personal/investing/investment-institute/ISR_043018_ADA.pdf

See referenced disclosure (2) (3) at http://blog.americanportfolios.com/disclosures/ 

About The Author

Cliff Walsh, CFA

 

Vice President of Asset Management 
631.439.4600 ext. 277 

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