Tuesday, November 8th 2022 – Midterm Election Day…a day that can move markets. In 2022, we have more to contend with than just midterms – inflation and war are other big contenders impacting our markets. We have featured blog posts about those topics this on our blog this year. This article focuses on the midterm election moving markets and that data behind this phenomenon.
One of the mutual fund families that we have worked with extensively over the years is American Funds – they have a history that dates back to the Great Depression. Founded in 1931, Capital Group launched it’s first fund Investment Company of America in 1934, the first of what has become the American Funds family of mutual funds. This company has been through a number of midterm elections! American Funds recently conducted a study that looked at 90 years of data and they found that midterm elections do have an impact on markets and that markets behave differently during midterm election years.
Typically, the president’s party loses seas in Congress, over the past 22 midterm elections, the president’s party has lost an average of 28 seats in the House of Representatives and 4 in the Senate. Since losing seats is commonplace it is typically priced into the markets early in the year but there is still some uncertainty in this equation – what will the impacts to policy be? Our markets do not like uncertainty and this leads to volatility.
Believe it or not the stock market goes up more than it goes down. However, these uncertain midterm elections seem to cause volatility in the first months of a midterm election year where stocks have lower average returns but once the path forward becomes more clear stocks tend to rally – there is typically an upswing in prices in the weeks before an election and those prices usually continue to rise after election day.
Historically, markets have had strong performance after election day. The full year following mid-term elections have had above-average returns. Since 1950 the average one-year return following a midterm election was 15% - that is more than double the return of a typical year!
Should your favored party not get the seats you hoped – do not fear – stocks have had an upward trend no matter the make up of government! Looking back from 1933 to 2021 – markets have had great returns regardless. Under a unified government, where the White House, House and Senate are controlled by the same political party the S&P 500 has had an average annual return of 10.4%. When the House and Senate are controlled by the same party but White House is not – S&P 500 has returned 7.4% on average. The best outcome for the S&P 500 is when there is a split congress – control of House and Senate by different parties regardless of White House control – under this scenario the average annual return is 10.8%!
Source: American Funds; https://www.capitalgroup.com/advisor/insights/articles/midterm-elections-markets-5-charts.html