November 7, 2022
This past year alone we’ve had the war in Ukraine, rising inflation and a veracious bear market – should you think about the midterm elections? Yes. Let’s look at some key factors which could indicate a trend, have investors taking notice and see if midterm elections really do have any effect on equity markets:
1. Seats in Congress
For the political party in current power, they are likely to lose seats in the house during midterm elections. This usually comes as the opposing side wishes to boost voter turnout, and the sitting president’s approval rating tends to dip its first two years in office. So, for 2023, this could put a halt on Democratic legislative advancements. Since losing seats is so common, it’s usually priced into the markets early in the year.
2. Muted Returns Until Later in the Year
Sources: Capital Group, RIMES, Standard & Poor’s. The chart shows the average trajectory of equity returns throughout midterm election years compared to non-midterm election years. Each point on the lines represents the average year-to-date return as of that particular month and day and is calculated using daily price returns from 1/1/31–12/31/21.
Returns for the S&P 500 Index since 1931 revealed that the path of stocks throughout midterm election years differs noticeably compared to all other years. Leading up to election, returns typically tend to not move much. The market stays flat- that is until we get closer to November, which we have seen this year. However, coupled with interest rates and rising inflation, this year has had unique variables in the mix. Still, we will likely see investors step up as decisions are made and uncertainty goes to the wayside once the polls have been cast.
3. Midterm Years and Volatility
And thus, often with midterm elections comes greater volatility - and not just from campaign slinging. As we creep towards November, on average there is a 3% increase in market volatility in an election year compared with all other years. While something to note, it’s not likely to dictate what’s beyond the election window.
4. Strong Returns After the Elections
Brace yourself - market returns after midterm elections tend to be strong. Above average returns tend to continue for a full year historically since 1950. While statistically we have seen an 8% increase in returns compared to non-midterm election years, there are unique circumstances surrounding this election with a potential recession next year with global concerns heating up.
5. Stock Performance and Washington Makeup
In all, regardless of who fills the seats, the stock market does well irrespective of the makeup in Washington. In fact, following the 2020 election, the S&P rose 42% for 14 months although investors were concerned of a blue wave or “Democratic sweep”. Thus, placing too much importance on election results can suppress some investors returns. In fact, in any outcome of midterm election results, there is at the least, a 7.4% average price return.
The bottom line? Maintain your long-term focus; market returns come from the value of individual companies over time. Midterms create a lot of short noise, which is just that.