Content provided by Shana Sissel, CAIA, Portfolio Manager
The U.S. midterm elections are just around the corner, and investors remain concerned about how the results could impact the equity markets. The answer is simpler than many may think: The midterm elections have historically been positive for U.S. equities.
It may sound odd not to consider the election outcome, but that’s because it largely doesn’t matter. As famed investment analyst Ken Fisher noted, since 1926 the S&P 500 has generated positive returns 87% of the time in the nine months following the midterm elections, regardless of which party won or whether there was a change in the majority. He calls it the “87% miracle.”
This phenomenon comes down to the known versus the unknown. The market hates unknowns, and the results of the midterm elections provide clarity as to the political landscape for at least the next two years.
Here are some interesting facts about the midterm elections, courtesy of Ned Davis Research and Fisher Investments:
- In 2018, more Democrats (26) are up for re-election than Republicans (9) in the U.S. Senate.
- More Democrats are up for re-election in states that Trump won on his way to the presidency. Most Republicans up for re-election are in states that voted Republican in 2016.
- On average, midterm years have been the weakest of the four-year presidential cycle for the stock market. Although, recent midterm years have not been as weak.
- Midterm years tend to endure elongated corrections in quarters two and three before a fourth-quarter rally.
- The correction that began on January 26 was earlier than normal but not as severe as the median midterm decline. The implication is that there will likely be more weakness later in the year before a year-end rally.
- Midterm years have been stronger than average under new Republican presidents.
- The president’s party has tended to lose Congressional seats, especially in the House of Representatives.
- If Republicans lose the House or Senate, historical trends suggest that the stock market could come under pressure.
While there are many variables and potential outcomes to consider as the midterm elections approach, the most consistent outcome is a healthy U.S. equity market in the months that follow. And for long-term investors, that’s what matters.