Mid-Terms and Stocks
24 hours.
That’s how long mid-terms owned the news cycle. The fall of crypto exchange FTX and easing inflation have pushed elections out of the way, for now.
Nevertheless, we aren’t ready to turn the page quite yet. Investors often wonder how elections will impact their portfolios. Now that mid-term elections over, we finally have some certainty, right? Not quite.
This may be well-known to some, but I was surprised to learn the party controlling the white house has gained seats in the House during mid-term elections just twice since 1940. Results in the Senate are similar, with the opposing party taking back seats ~70% of the time.
That trend may have continued in 2022. Republicans appear poised to take control of the House while control of the Senate is yet to be determined.
Regardless of policy agreements or disagreements, red waves or purple hazes, investors often wonder if certain political outcomes are better than others.
For those with a short attention span, I’ll save you some time – not really.
That’s not to suggest policy decisions don’t influence business outcomes. They surely do. However, correctly forecasting (1) who wins elections, (2) policy proposed as a result of the election, (3) which policy proposals are actually passed into law, (4) unexpected provisions added to bills to improve odds of passing, (5) timing of enforcement, and (6) how investors will react to each of these outcomes is….well…good luck.
Maybe there is a simpler approach. How have stocks performed in different scenarios around previous mid-term elections?
The chart below shows performance of the S&P 500 in the year leading up to the election (green diamond), and then the annualized 10-year return after the election[1] (dark green bars).
Is this good or bad, better or worse than normal?
It turns out using the mid-term election month as a starting point is pretty similar to other periods. There are five groups represented in the chart below, using data since 1930:
Mid-term (Republican): the average 10-year return for the S&P 500 following mid-term elections with a sitting Republican president
Mid-term (Democrat): same, except the president is a Democrat
Mid-term (Negative): same, except it only includes years like 2022 where the stock market has been down during the year leading up to the election
All periods: this is the average of all 10-year periods since 1930
All periods post-1950: same except the starting point is January 1950
10-year annualized returns ranged from 6.3% to 7.4%. Less than 0.5% per year separated the Republican-headed periods from those beginning on a Democrat’s watch.
Some may say 10 years is too long a period to measure impact from an election. I agree.
Long-term goals deserve long-term thinking. Since the long term is just a series of short terms, I believe the surest route to long-term success is avoiding mistakes that would purely satisfy short-term urges.
In other words, we wouldn’t make sweeping changes to long-term portfolios based on who wins or loses next Tuesday.
Even if mid-term elections don’t go the way you had hoped, take comfort in knowing other factors – and more importantly, how you react to those factors – are likely to have a much bigger impact on your stock returns over the next decade.
Interested? Please feel free to reach out to me at eric@divviwealth.com or set up time with the Divvi team to continue the conversation.
Opinions expressed herein are solely those of Divvi Wealth Management and our editorial staff. The information contained in this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. All information and ideas should be discussed in detail with your individual adviser prior to implementation.
[1] Performance leading up to elections is through October 31st each year. Performance following elections begins on December 1st each year.
