What Effect Will Midterm Elections Have on the Stock Market?
November 13, 2018
By Krista Biernbaum, CFP® • Securities Analyst II
All eyes were on the midterm elections last week. Leading up, there was uncertainty on the possible outcome and its impact on the markets. Now that midterms are finally over, what does this mean for the stock market moving forward? To answer this, let's take a look back at history.
The initial market reaction to the election outcome was very positive. The S&P 500 rose more than 2 percent on Wednesday. Why? With the elections done, one of the uncertainties facing the markets was resolved. Also, the outcome went as generally expected; the best case for most analysts was a split Congress.
Okay, so … the initial reaction was favorable, great! How about over the next year? The answer may surprise you.
The Midterm Election's Historical Impact on the Markets
Below are two charts from PIMCO. The first is the total return of the S&P 500 for the 12 months following every midterm election since 1942. History shows that returns are positive, regardless of the party control or the President’s party. The second highlights that returns are even more favorable when both parties share Congressional power. When we have a split Congress, the average return for the S&P 500 is over 20 percent for the following year. Not too shabby!
Keep in mind that history is not a guarantee of what will happen over the next year. However, as the famous saying goes:
“history does not repeat itself, but it often rhymes.”
– Mark Twain (and Mike Moreland)
With a split Congress for the next two years, there is likely to be gridlock. Odds are that we will not see any big policy changes anytime soon. This brings some certainty to the stock market and U.S. companies, which bodes well for stock returns. However, other uncertainties remain regarding trade, slowing global growth, and the Fed. Only time will tell how those play out.
What does this mean for your portfolio?
In the meantime, try to focus on the key takeaway from this commentary: the stock market has recorded positive returns in every year following a midterm election since World War II. If you have any questions, contact an advisor today. While anything can happen over the near term, it’s the long term that counts. Let us help you meet your goals – regardless of the party in power.