Midterm Elections: The Politics Of The Stock Market

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Since midterm elections are only a month away, it’s worth considering the implications of any change in government control. This analysis will attempt to be non-biased as investors would be wise to avoid party politics while making investment choices. Some were concerned when President Trump was elected, and the S&P 500 had an overall return of about 24% in the following year. Similarly, the total return of stocks in the year following President Biden’s election in 2020 was more than 40%. Too many other factors influence the stock market to attribute performance to one person, regardless of party affiliation, especially since the government also has two. Legislative Branches.

Interestingly, according to Dan Clifton at Strategies, the stock market in 2022 has generally followed a downward path since 1962 for a mid-term election year. The S&P 500 is down a little more than a normal 19% intra-year decline, but the news is improving if stocks stick to the script. The stock has hit historical lows in October and has gained an average of about 32% over the next twelve months. Clifton notes that the stock has been positive in the year since everyone Mid-term elections from 1942!

Mark Twain is credited with saying, “History does not repeat itself, but it rhymes.” There are reasons to be concerned that rhymes with the past may not be as good as one would like. The recession hasn’t started in the third year of the 1929 presidential cycle. This fact and luck probably help explain the lack of 12 months of declining stocks since 1942 after the midterm election. Unfortunately, the historical streak of no recession is likely to end next year, with the Federal Reserve likely to slow growth in its fight against inflation.

On the bright side, stocks are already up more than 20% from their highs. While it’s painful, stocks have outperformed the average after more than 20% from historical highs. Investors with a time horizon of three years have a desirable risk versus reward ratio for investing in stocks. The S&P 500 typically bottoms out before the economy, so investors waiting for better economic data as a sign to reinvest in stocks are likely to be disappointed. As an added complication to trying down times, the initial price rebound in stocks at the start of a new bull market is usually unpredictable and explosive.

As to the likely outcome of the midterm election, the betting is only a 22% chance that the Democratic Party will retain unified control of the government.

Any political bias aside, this is probably good news, as stocks have historically performed best under divided control of the US government. Many argue that the market favors the impasse, but one can also note that compromising to pass legislation probably helps curb the worst impulses on both sides. Myriad factors affect stocks, and the most important long-term factor is earnings, so politics should fade into the background over a lifetime of investing.

Stocks have generally followed a downward path for the midterm election year since 1962, but the news improves if they stick to the script. Stocks have historically bottomed in October and have been positive in the year following every midterm election since 1942. Aside from any political impact on stocks, a more fundamental bullish case with better risk versus reward could be made after this year’s sell-off as the markets are well. Aware of recession risks. Investors should have an appropriate asset allocation and focus on high-quality, attractively priced companies to ride through any disruption from the impending recession and benefit from a subsequent recovery.

Credit: www.forbes.com /

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