Mid-term elections and the market: What history tells us
Well, the election is over, thank goodness. As I write the column on Tuesday mornings, we do not yet know the results, but it's probably fair to say one political team is happy and the other cranky about the outcome. My biggest concern at this moment is can someone please make all the annoying political marketing texts stop. I don’t remember ever “opting in” to receiving any of these campaign texts, which I am now receiving from both parties. I don’t know when this became acceptable, but blowing up my phone two to three times an hour seems excessive and did not change one thing about my voting decisions.
The smart money is saying the Federal government will likely be more divided after this election, with Democrats expected to win at least one house of Congress. So, despite whether this new reality disturbs or elates, there are some pretty solid historical market trends we can use to help make investment portfolio decisions for the next quarter or so. Let’s go through some history and see what it tells us.
First, are the mid-term election years themselves. According to research from the Capital Group, the calendar year hosting mid-term elections tends to be lackluster for the stock market (S&P 500), posting historically below average (mid-single digit) returns over the past 50 years. In addition, mid-term election years have tended to be more volatile as well, with average mid-year drawdowns experienced during mid-term election years close to 20%. So, lower average returns with more volatility, doesn’t sound like a great combination to me, and historically mid-term years have been the weakest of each four-year Presidential election cycle, but this isn’t the entire story.
Of course, U.S. elections are held in early November, and by the time mid-fall rolls around most of the stock market cake is baked for the year. Mid-term years can definitely be more contentious from a social mood perspective, as candidates fight it out in the media (and over text message), with one side trying to convince us the party in power is the worst ever, and the other party attempting to convince us the world will end if they lose. All the rhetoric can contribute to social anxiety, which affects social mood, which I believe can have a strong influence on financial markets. So, it’s no wonder to me mid-terms years tend to be tough for markets.
Now, however, the election is over, and this is when the historical record changes a bit. With all the electioneering behind us, theoretically the propaganda should settle down as Americans go back to football season and holiday prep. Historically as we are putting the election behind us, the stock market is also shifting gears and the 12 months following a mid-term election have seen above average returns in the S&P 500. In fact, according to research published by Oppenheimer Group, over the past 50 years there have been 19 years following mid-term elections, and the market was positive in all 19 of these years, which is a decent batting average.
Remember however, this time it's different (not really), and some of us believe the world has been saved from the wickedness of the other political team, and some of us are sure the apocalypse was ushered in on Tuesday. So, what does history tell us about those elections which led to a split Federal government, where no one party controls either Congress or the White House?
Well, in these supposedly apocalyptic scenarios, the S&P 500 tends to actually outperform even the above average returns historically experienced in the 12 months following a mid-term election. I suppose it would be reasonable to assume investors perhaps prefer a split and gridlocked Washington, which is consistent with our American tradition of embracing a separation of powers when it comes to government.
What does all this historical data mean? Well, candidly, very little. Past performance in financial markets is never predictive of future outcomes, and while I think the words “this time is different” represent a unique form of folly for investors, the truth is all time periods are unique with trends and metrics that are every moving and changing.
So, I guess my real point is, if you think everything is good now that your team prevailed, or the world is a disaster because your team lost, neither is likely to be accurate. We all still have to go to work, take care of our families, prepare for retirement and attempt to steward our capital and savings wisely for ourselves and the next generation. Yes, there is insight to be gleaned from the election results, and historical trends can also be useful when making portfolio decisions, but elections themselves are not likely to determine our ultimate success as investors. I, for one, am just happy it’s over.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. This material may contain forward looking statements; there are no guarantees that these outcomes will come to pass.
Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com .
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