Will midterm elections sink the stock market? Here's what history says

Uncertainty ahead of midterm voting has often given away to market strength late in the year.

  • By William Watts,
  • MarketWatch
  • Investing Strategies
  • Investing in Stocks
  • Market Analysis
  • Market Volatility
  • Markets
  • Stocks
  • Investing Strategies
  • Investing in Stocks
  • Market Analysis
  • Market Volatility
  • Markets
  • Stocks
  • Investing Strategies
  • Investing in Stocks
  • Market Analysis
  • Market Volatility
  • Markets
  • Stocks
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

After brushing off high-decibel trade spats between the U.S. and its global trading partners as well as President Donald Trump’s legal woes, the bull market’s next challenge might come from the ballot box.

“Markets will be closely watching the upcoming midterm elections as shifts in the balance of power in Washington could have meaningful implications for fiscal policy and foreign relations,” said Niladri Mukherjee, director of portfolio strategy in the Chief Investment Office at Merrill Lynch and U.S. Trust, in a note.

As with those other tangles, however, it isn’t clear that the midterm congressional elections on Nov. 6, which could conceivably see Republicans lose control of the House and, though less likely, the Senate, would be enough to derail the bull market.

A quick look at historical performance shows that stocks often see rough sledding in the September of years that feature midterm elections —and other years as well. For midterm years, analysts often chalk it up to uncertainty, since midterms typically see the incumbent president’s party lose seats. That same look at historical performance shows that stocks tend to do just fine as Election Day nears and in the aftermath of the vote, regardless of the outcome, as uncertainty begins to fade.

Analysts led by Keith Parker at UBS note that the S&P 500 (.SPX) has rallied an average of 14.5% from the end of August to the end of March around midterm elections (see chart above). That includes a rocky start marked by a median decline of 1.4% from the end of August through early October followed by rally through year-end and into the next year. Moreover, the rally in equities around midterm elections has been much stronger than the average returns seen in all other years.

Taking a more short-term approach, Binky Chadha, chief strategist at Deutsche Bank, noted that the three-month period running from a month ahead to two months after the election has produced a median 8% gain. And that includes only one decline, a 4% drop in 1978, over that period in the last 21 midterm years.

That’s all encouraging for market bulls. But as the analysts caution, history is only a guide. Moreover, it isn’t clear that the performance is necessarily all about politics and uncertainty.

While Chadha looked at midterm years stretching back 80 years, that’s a sample of just 21 elections, which warrants caution when it comes to interpreting correlations, he said. In fact, he suspects the performance has more to do with the coincidence of other traditional drivers, such as growth and earnings.

Chadha noted that S&P 500 returns around midterms have carried a 76% correlation with changes in the Institute for Supply Management’s activity index in the six-month period surrounding Election Day.

“This suggests that it was growth and not the midterm elections per se that was the key driver of the rallies,” he said.

Seasonal factors also provide a tailwind in the three-month period around midterms. After controlling for growth and seasonality, the magnitude of the performance attributable to the elections in the October-to-December period during midterm years is smaller than first appears and is more likely on the order of 0.5% to 2.5%, he said.

Meanwhile, the policy implications of the election can’t be ignored.

“The president’s party has historically not fared well during midterm elections, and the results could affect the likelihood of certain pro-growth measures such as the so-called Tax Reform 2.0, which could include making individual tax cuts permanent and create new incentives for retirement savings and research and development,” said Mukherjee.

Others argue that Democratic majorities could make for more confrontation, including government shutdowns, investigations into Trump administration activities and even the threat of impeachment, which could unsettle markets, at least temporarily.

But Mukherjee and others also argue that a change of control in one or both chambers could be a positive, offering a counterweight to the White House’s trade policies.

With Trump’s signature tax cut and fiscal package already enacted, the midterms “could act as a check on market/economy-unfriendly rhetoric and actions by the Trump administration, particularly as it gets closer to the elections,” Parker said.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

For more news you can use to help guide your financial life, visit our Insights page.


Copyright © 2018 Dow Jones & Company, Inc. All Rights Reserved.
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.