The stock market in 2022 faces a number of significant headwinds, ranging from inflation and supply chain constraints to new COVID variant breakouts and geopolitical frictions. Add another one to that list—the upcoming midterm elections.

Midterm Elections Bring Lower Returns…

According to research by Capital Group, a large asset manager, market returns in a midterm election year tend to be tepid, owing perhaps to the uncertainty they create with investors.

In their examination of all midterm elections from 1931 to 2014, Capital Group found that stocks tend to gain little ground until shortly before the elections are held in November, with a tendency to rally once the elections are complete.¹ The stock market performance in 2018 deviated somewhat from this historical pattern, falling 6.59% for the year.²

Since 1946, midterm election years have seen about a 6% gain in the S&P 500, though under a Democrat president’s midterm the average performance is about 4%. Sliced more narrowly and looking at just the midterm election years for first-term Democrat presidents (as is the case with President Biden), the average return is a loss of 0.6%.³

…and Increased Volatility

Reflecting the uncertainty that midterm elections present, price volatility tends to be higher in such years. In fact, since 1970, volatility in the S&P 500 index has been, on average, higher in 10 of 12 months, with the greatest volatility in the months leading up to and including November.⁴

However, markets do tend to bounce back in the year following a midterm election, with average one-year returns after the midterm election of 15.1%, versus all other years’ average return of 6.8%.¹

What This Means for Investors

Though historical experience suggests a correlation between midterm election years and stock market performance, investors should bear in mind that each year will have a unique set of factors that may have greater influence on the performance of stocks in that year (positive or negative) than the midterm election.

Viewed from a different perspective, midterm elections, for the long-term investor, are short-term distractions that shouldn’t interfere with their long-term perspective on the markets or the fundamentals of their financial plans. Investors who ignore market noise, whether they come in the form of midterm elections or geopolitical saber rattling, are those who typically most enjoy the benefits of the stock market’s potential to deliver long-term capital growth.

Sources:

1. https://www.capitalgroup.com/advisor/ca/en/insights/content/articles/us-midterm-elections-and-market-moves.html
2. https://dqydj.com/2018-sp-500-return/
3. https://www.moneyshow.com/articles/dailyguru-57866/seasonal-timing-and-mid-term-election-years/
4. https://www.capitalgroup.com/advisor/ca/en/insights/content/articles/us-midterm-elections-and-market-moves.html

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