How Midterm Elections Can Influence the Markets

Midterm elections are always important. The outcome can determine which party has control of the House and the Senate. The results can send a signal for the next presidential election. Midterms can also influence the markets as well.

How did the markets perform during part midterm elections?

Based on data from Bloomberg, going back to 1962 the market has significantly underperformed in the twelve months leading up to the midterm election. On average, the S&P 500 has returned 0.3% over these twelve-month periods compared to 10.7% during other twelve-month periods not surrounding midterms.

However, in the period after the midterms since 1962, the S&P 500 has outperformed other similar periods.

For the three months after the election, starting November 1:

  • The average performance following the midterm elections was a gain of 7.3% versus a gain of 2.9% over other three-month periods.

For the six months after the election, starting November 1:

  • The average performance following the midterm elections was a gain of 15.1% versus a gain of 4.2% over other six-month periods.

For the twelve months after the election, starting November 1:

  • The average performance following the midterm elections was a gain of 16.3% versus a gain of 6.4% over other six-month periods.

Sam Stovall, the Head of US Equities Strategy at CFRA says, “Second and third quarters of midterm election years are by far the worst quarters of the sixteen-quarter presidential cycle.”

How midterm elections impact markets

There is a lot of debate as to why markets tend to underperform leading up to the midterms, then outperform in the months after the elections.

One theory surrounds the uncertainty as to which party will retain or gain control of Congress after the midterms. This could impact a number of social and economic policy initiatives after the elections.

However, studies have shown the party in control of Congress has no real impact on market performance.

A more likely factor in market performance leading up to the midterms is the state of the economy. In years where the economy was in bad shape the market performance leading up to the midterms was poor. As a case in point was the -31.8% performance of the S&P 500 in the twelve months leading up to the midterms in 1974. This was a period of high inflation among other issues.

If we exclude the five midterms during the 1960s and the 1970s, the S&P 500 gained an average of 8.1% in the twelve months leading up to the midterms, more in line with the index’s overall twelve-month performance.

As we look towards the 2022 midterms, there are several possible outcomes:

  • Republicans win control of either the House or the Senate. This would likely result in a logjam for any legislation the president and the Democrats want to enact.
  • Republicans win control of both houses of Congress. This would limit opportunities for bipartisan cooperation and be a strong headwind for the president’s agenda.
  • Democrats retain control of both the House and the Senate. This would be a bit of a status quo, there is more likelihood of some bipartisan cooperation for the president’s agenda.

Any of these outcomes could have either a positive or negative impact on the markets.

According to Stovall, “The last quarter of this year, first two quarters of next year are by far the strongest in the sixteen-quarter presidential cycle because the uncertainty surrounding midterm elections has run their course. Also historically, we have never posted a decline from November 1 of a midterm election year through November one of the subsequent year.” Based on this assessment the fact that the election will be behind us could be the most important factor for the markets.

Will your investments be impacted?

It is hard to say if the results of the 2022 midterms will impact your investments. Political developments can have an impact at any time, not only surrounding midterm elections.

Long-term investors should not be overly concerned about the results, however. There are always factors in politics, the economy and world affairs that can impact your investments in the short-term. As a long-term investor your focus should be on your asset allocation, your risk tolerance and achieving your financial goals.

If you are concerned about the potential impact of the midterm elections on your portfolio, this is a good time to contact your Wedbush financial advisor to discuss your portfolio and to be sure your investments are properly allocated and aligned with your goals.


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