Midterm Elections – Stock markets tend to go up from here

The US midterm elections are behind us. As expected the Democrats took the House while Republicans hold the Senate. So what happens now? Surely we can’t tell, but if history is any guidance stock markets tend to go up from here. Five charts on (equity) market performance after the midterm elections.

  1. On average, equities went up!
    The chart above shows that, on average, equities start to go up just before the elections and keep going up well into the next year. More importantly, equities tend to go up much faster in midterm election years than in all other years. Needless to say, substantial differences occur during different elections. This year for example, stock markets cratered in the run up to the midterms, as you will surely remember.
  2. Also, equities went up after every midterm election
    However, a chart showing the 12-month return after every midterm elections since 1946 shows equities went up every time. Again, return differentials are large, but the fact is equities didn’t fall once a year after the elections. The average return over all observations was a very impressive 15.3%.
  3. But what about ‘gridlock’?
    With the Democrats gaining control of the House of Representatives odds of a political gridlock, in which legislation becomes harder to pass, have increased. But the chart above shows it has become pretty common for the Presidential party to lose the majority in one or both houses (it happened everytime during the last four midterm elections). Also, it does not necessarily mean equity market weakness. Both the biggest and smallest 12-month S&P 500 Index return followed after a change in control in one or both houses.
  4. 12-month is a light-year away in financial markets

    For those investors having a shorter horizon than 12 months, things look pretty ‘ok’ as well. During midterm elections years, the S&P 500 index went up almost 11% on average from the October low until the end of the year. Again, the return was positive for every occasion since 1950. By the way, this year’s October low was on the 29th, and the S&P 500 Index has risen 4% since then, leaving enough room for further gains if the midterm average is any guidance.
  5. I’m invested a multi-asset portfolio, as I should

    Hopefully, investors do not just own equities, as they learned about the power of diversification.Therefore, also a midterm-chart containing other asset classes besides equities. As it turns out, risk assets are the way to go, with both equities and high yield bond performance looking strong 6-months after the elections.

So, if historical data on midterm election returns is any guidance, there’s a compelling case for equities going forward. If you add to this that a recession is unlikely within the next 12 months, earnings growth will remain decent, and valuations have come down quite considerably, then it seems a bit premature to call the end of this bull market.

 

 

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