Market Insights: Market performance following US midterm elections

Market Performance Following US Midterm Elections

We came across some interesting data, charts and comments on US equity market performance following midterm elections that we wanted to share this week. Based on the historical data, you could sum up the findings as the following equation: Midterm Elections + Equities = Buy!

Why do we say this? Well, let's look at the data. Since WWII, there have been 18 midterm elections, and after every single one of them, stocks have always moved higher over the following 12 months. That is 100% of the time. Under every possible political combination over the past 72 years, stocks have climbed higher, and often quite strongly. We don't often like to extrapolate historical data into a potential future outcome, but that is definitely a strong finding. 

Here are some charts that show the evidence. According to the Wells Fargo Institute Investment Institute, since 1962 (14 midterm elections) the US markets have seen a pullback of almost 19% on average at some point during the year prior to a midterm election, but have then climbed an average of 31% one year later following the midterms. 

Looking at the data in another way, here is a table that shows the returns of the S&P 500 following the day of midterm elections. One year following the midterm Election Day, the market has been up 100% of the 18 prior occurrences, averaging 14.5%. The six month result is equally as strong.

And how about calendar years of the US presidential cycle? From 1928 to 2016, the third year of the presidential term has been by far the strongest for markets. 2019 is the "third year".

With all this, however, Milestone doesn't believe political parties or even the President have control over how markets perform, at least not in the long-term. As stated in our past missives, we look at the overall weight of objective evidence when formulating our longer-term investment stance; these factors being monetary, economic, valuation, sentiment, supply/demand, and momentum/internal/ technical. At present, even after a difficult October, the weight of evidence from our lens keeps our positive fundamental thesis intact. It is best to follow the sage advice of legendary investor Warren Buffett: "If you mix politics and investing, you're making a big mistake".