The market usually rises after the midterms. Will this time be the same?
Historically, the stock market has traded in four-year cycles that coincide with election years.
Midterm election years typically saw the lowest stock market gains of the cycle, with the S&P 500 increasing 5.8% on average since 1932. But the index typically sees a notable average gain of 16.3% in the year following an election.
However, if you dig into historical market data and you'll easily see that specific returns vary from year to year. The lowest was 5.2% and the highest was 41.4%, while the average performance was an increase of 16.3%.
Source - RBC Capital Markets U.S. Equity Strategy, Bloomberg; based on price returns and does not include dividends
The historical performance in the period before and after the midterm House and Senate elections is among the most significant of the seasonal equity market cycles. It has maintained no matter what is happening in Washington or not, and no matter whether party was in charge or was gaining or losing support.
The S&P 500 typically experienced a pullback or correction at some time during the 12-month period leading up to the midterm elections in the 22 instances studied that dated back to 1934. During this period, the index has lost an average of 20.6%.
Source - RBC Wealth Management, Bloomberg; performance surrounding 22 midterm election years
This year the S&P 500 has undergone a typical correction ahead of the midterm elections. From its peak in January 2022 to its nadir in October 2022, the index has fallen about 20%, close to the average of previous cycles.
The above case study suggests that the market may even rise by an average of more than 47% in the year following the mid-year election. Interestingly, such a huge increase usually occurs in the fourth quarter of that year, bringing the year to a happy end.
It's noteworthy that that over the past seven midterm election periods, markets have set records in inflationary periods less frequently than we have seen in non-inflationary periods.
Is there a general trend in market performance in terms of changes in party power?
While not always the case, markets have rather welcomed some form of gridlock in Washington, namely a divided government between the two major parties.
Source - RBC Capital Markets U.S. Equity Strategy, Haver Analytics; based on price returns and does not include dividends
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Election effects are not the only influencer
If history is a guide, the market may do well given the past results of midterm elections and the potential of gridlock in Washington following the November 8 vote.
However, investors should remember that U.S. stock prices are not solely or even mostly influenced by elections. Market performance is more closely tied to the Fed's monetary policy decisions, the cyclical nature of the economy, and changes in associated business earnings.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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Xiaoxi_penguin : That's indeed true. If the election outcome is in favor of the existing government, it indicates that there is political stability, thus stock market rises. Although change in party may indicate otherwise, usually the new party tends to promise an election manifesto which comprises of a list of promises policies in economy, social etc.. which shows that a positive market trend.
intuitive Jackal_354 : I 100% agree, after elections the market gets clarity. no matter who wins it always goes up. now with the present economy and government, I expect with a republican win a 20% bounce up and if the democrats win a 10% bounce just on clarity alone
intuitive Jackal_354 Xiaoxi_penguin : well said
Xiaoxi_penguin intuitive Jackal_354 :![[undefined]](https://static.moomoo.com/nnq/emoji/static/image/default/default-black.png?imageMogr2/thumbnail/36x36 "undefined")
PowChuckie Xiaoxi_penguin : your comment is confusing
Giovanni Ayala :![[undefined]](https://static.moomoo.com/nnq/emoji/static/image/default/default-black.png?imageMogr2/thumbnail/36x36 "undefined")
Xiaoxi_penguin PowChuckie : It explains why no matter the current party lose or gain support, there is always an initial uphill to the market as you could see from the chart and description above since the party that wins it will have majority vote (so more are positive about the increase trend)![[undefined]](https://static.moomoo.com/nnq/emoji/static/image/default/default-black.png?imageMogr2/thumbnail/36x36 "undefined")
PowChuckie : chart shows best outcome is split party president from Congress
Xiaoxi_penguin PowChuckie : Let's say 60 votes for the existing government while 40 votes for the new party. 60 are now more positive that the government is doing the right thing and will have a better future ahead . On the other hand, 60 votes for the new party while 40 votes for the existing party. 60 are now positive that the change of the government will lead to a better economy. So either way, both indicate positive trend, it's all about majority rules at the end and most the rest will be doubting themselves and follow the flow with minority will look for other opportunities which don‘t have much impact as compared to the majority.
PowChuckie : we in different times my friend. so many other factors than this election will determine outcome on market. just heard bad Fed speech, companies laying off, inflation still high, real estate market slowing, retail sales slowing. market might get bump from midterms, but it will be short lives when flashbacks of 2008 comes back to haunt us. no government can continue printing trillions of dollars and think we can spend our way out of this
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