Midterm Elections And The Market
Updated: Jan 17
Wall Street has been closely watching the U.S. midterm Congressional elections, and now that the uncertainty is over, investors are hoping that the volatility will subside. After all, if there is one thing that the markets hate, it’s uncertainty. In the much anticipated election, the Democrats have taken back control of the House, with Republicans maintaining control of the Senate. A lot has been written about how different results can affect the markets, especially given all of the volatility in the month of October. Policy decisions affect corporate and consumer spending, and ultimately the economy and stock prices. Recent polling predicted a split Congress, and since the markets have been pricing this in already, investors should be happy with the election outcome in the short-term. Regarding longer-term impact, midterm elections tend not to be a major market event, and a lot has been written lately about historical returns following elections. A study conducted by S&P Capital IQ in 2014 concluded that the market (defined in this study by the S&P 500 Index), has gained 15.3% on average in the six months following a midterm election in the third year of the presidential term (which we are in). We certainly aren’t making short-term predictions and past performance does not guarantee future results, but it is an interesting study to share. Furthermore, many studies suggest that the market usually does well after the uncertainties of the midterms are over, and even more so when there is a split government. Yes, there are a wider range of policy risks, but investors have tended to prefer some gridlock, based on the idea that the markets do well when Washington doesn’t get in the way. Changes in Washington have not historically impacted long-term performance, and we should never be investing just for the short-term. Either way, the outcome should not be a reason to make significant changes to our investment plans. It is natural to think that we are in a time that we have not seen before, but past performance has time and time again shown us the value of sticking to a long-term plan. The most important issues affecting the market right now are monetary and trade policy risk, which have been the bigger challenges facing the stock market this year. With the economy doing well and low unemployment, the Fed continues to maintain a "hawkish" policy and will continue to tighten monetary policy by raising short-term rates. Trade talks with China are scheduled in the coming months, and both sides have suggested that a deal can be made. The president does not need congressional support to enact policy. Time will tell if talks break down, with the markets closely watching. As always, please do not hesitate to reach out with any questions.