What Midterm Elections Mean for the Market
I love this time of year. Fall means football, pumpkins, and Christmas is around the corner. Unfortunately, fall can also mean those incessant commercials reminding us that elections are within reach. This year is a midterm election, and it seems unfair to me that with all the things happening in the world, we must also decide our leadership now too! Let’s look at how this may impact the stock market.
Historically, the stock market performs better in the six months after an election, than the six months before.[1] This is usually because the public expects there to be more government spending with a new Congress, but with all the uncertainty in the world nowadays, it can be hard to predict the stock market outcome after midterms.[2] The war in Ukraine and the 40-year-high inflation rate definitely seem to exacerbate the issue.[3]
According to Politico, the Republicans are expected to win the majority in the House
of Representatives.[4] In order to win the majority, they need to win five seats in the House and one in the Senate.[5] This doesn’t necessarily mean that the market will improve. In fact, one economist, Joe Brusuelas, explains that “Historically, investors prefer shared power across the Federal Government.” [6] An example of this would be in 2010 when Obama was president, Congress was split with a Republican House and a Democratic Senate, which, during that period, the S&P surged nearly 70%.[7]
All this uncertainty does the market no good, as we’ve seen during the pandemic, but there is room for some good news on the horizon. We can hope for those historic good returns in the 4th quarter of 2022 and 1st quarter of 2023 following the midterms, as I briefly mentioned earlier. On average, the fourth and first quarter returns following a midterm election rises 6.1% and 7.5%, respectively.[8] Another thing to keep in mind is that no matter what the result is with the midterm elections, it shouldn’t have a huge impact on your investment portfolio or strategy that you have with me or any other financial professional. In fact, it’s economic fundamentals that really drive the market performance surrounding the midterm elections, rather than the results.[9] Right now with the Fed trying to control the inflation rate and tightening monetary policy will most likely have a greater impact on the market compared to whoever wins the election.[10]
To summarize, elections are extremely important, and most people focus on presidential elections, but midterms are vital - especially this year when both houses seem to be up for grabs. It is important to remember however, that the political landscape is only one factor of many contributing to stock market performance. It isn’t as cut and dry as “if this party wins, then the stock market will improve.” It is also important to note that the midterm election will more than likely not have an impact on the Federal Reserve and the decisions they make. The current interest rate environment and the resulting impact to inflation is as important, or perhaps more important, than the midterm elections. The most important thing to remember is to get out and vote!
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The views depicted in this material are for informational purposes only and are not necessarily those of Cetera Advisor Networks LLC. They should not be considered specific advice or recommendations for any individual.
Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
[1] Charles Schwab. “Will Midterms Affect Market Performance?” https://www.schwab.com/learn/story/will-midterms-affect-market-performance#:~:text=Stocks%20tend%20to%20outperform%20after,months%20leading%20up%20to%20it. Accessed 09//14/2022 [2] Charles Schwab. “Will Midterms Affect Market Performance?” https://www.schwab.com/learn/story/will-midterms-affect-market-performance#:~:text=Stocks%20tend%20to%20outperform%20after,months%20leading%20up%20to%20it. Accessed 09//14/2022 [3] Charles Schwab. “Will Midterms Affect Market Performance?” https://www.schwab.com/learn/story/will-midterms-affect-market-performance#:~:text=Stocks%20tend%20to%20outperform%20after,months%20leading%20up%20to%20it. Accessed 09//14/2022 [4] Steve Shepard. “The House Likely Republican.” https://www.politico.com/2022-election/race-forecasts-ratings-and-predictions/house/ Accessed 09/14/2022 [5] Klebnikov, Sergei. “Here’s What Happens to the Stock Market if Republicans Take Congress in November.” https://www.forbes.com/sites/sergeiklebnikov/2022/01/19/we-looked-at-how-the-stock-market-performs-during-midterm-election-yearsheres-how-2022-may-be-worse/?sh=5360230b2562 Accessed 09/14/2022 [6] Klebnikov, Sergei. “Here’s What Happens to the Stock Market if Republicans Take Congress in November.” https://www.forbes.com/sites/sergeiklebnikov/2022/01/19/we-looked-at-how-the-stock-market-performs-during-midterm-election-yearsheres-how-2022-may-be-worse/?sh=5360230b2562 Accessed 09/14/2022 [7] Klebnikov, Sergei. “Here’s What Happens to the Stock Market if Republicans Take Congress in November.” https://www.forbes.com/sites/sergeiklebnikov/2022/01/19/we-looked-at-how-the-stock-market-performs-during-midterm-election-yearsheres-how-2022-may-be-worse/?sh=5360230b2562 Accessed 09/14/2022 [8] Klebnikov, Sergei. “Here’s What Happens to the Stock Market if Republicans Take Congress in November.” https://www.forbes.com/sites/sergeiklebnikov/2022/01/19/we-looked-at-how-the-stock-market-performs-during-midterm-election-yearsheres-how-2022-may-be-worse/?sh=5360230b2562 Accessed 09/14/2022 [9] U.S. Bank. “How Midterm Elections Affect the Stock Market.” https://www.usbank.com/investing/financial-perspectives/market-news/stock-market-performance-after-midterm-elections.html Accessed 09/15/2022 [10] U.S. Bank. “How Midterm Elections Affect the Stock Market.” https://www.usbank.com/investing/financial-perspectives/market-news/stock-market-performance-after-midterm-elections.html Accessed 09/15/2022