A Stock Rally After Mid-Term Elections is No Sure Thing

Stocks have historically ascended in the 12 months following mid-term elections.

Stocks have historically rallied in the 12 months following mid-term elections.

Does that guarantee stocks will rise after the Nov. 8 vote? Absolutely not. Stocks’ long-term path is determined by the strength of their earnings. And it’s not clear what impact election results will have on earnings.

The average price return for the S&P 500 in the 12 months following mid-term elections since 1950 is 15%. That does beat the annualized return of 13.2% for the entire period of 1950 through 2021. But not by a lot.

The changing structure of the stock market makes the data before 1990 of questionable value, Dave Sekera, chief U.S. market strategist for Morningstar, writes in a commentary.

And since then, fundamentals – economic, financial and geopolitical developments — explain much of the weakness in stocks before mid-term elections and much of stocks’ strength in the periods after them, he said. Sekera cited several examples.

History of Mid-Term Periods for Stocks

In 2018, stocks started falling in September in response to interest-rate increases by the Federal Reserve. Sliding global economic growth also hurt. Then stocks rebounded in 2019, as the Fed reversed its monetary policy.

In 2014, energy stocks tumbled, as oil prices plunged due to increased production from fracking. “Economic growth slowed in the second half of the year, … [and] a flash-crash in the U.S. Treasury market further damaged market sentiment,” Sekera said. The market rebounded in 2015, as fundamentals improved.

In 2010, stocks were still suffering from the global financial crisis of 2007-09, Sekera said. “In the second half of the year, the economic rebound appeared to wane,” hurting stocks, he said.

“The Fed launched a second round of quantitative easing in November 2010, consisting of a $600 billion bond-buying program,” Sekera pointed out. And that helped equities recover in 2011.

In 2002, “the market was still in the process of trying to find a bottom after the burst of the dot-com bubble,” he said. It did so in 2003, as Fed interest-rate cuts helped stimulate the economy.

In 1998, Russia defaulted on its debt, and a major hedge fund, Long Term Credit Management, collapsed, raising concern about financial market stability. That derailed stocks. But they came back in 1999, as the economy withstood the turmoil.

In 1990, a recession began in July, and Iraq invaded Kuwait shortly before the mid-term elections, depressing stocks. But the economy bounced back in 1991, buttressing stocks.

Forecasting Stocks

The outlook for fundamentals isn’t so hot now, so don’t be surprised if equities break the pattern this time around and fail to rally in the next year. The negative fundamentals include a slowing economy, raging inflation and sharp interest-rate increases by the Fed. The war in Ukraine isn’t helpful either.

Of course, recent stock-market declines and any further weakness create buying opportunities. But you’re better off keeping mid-term elections out of your decision-making process for investing in stocks. At this point, we don’t know how the election results will affect fundamentals.

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