This week was midterm elections and we’ve had many questions about what it all could mean, which we’ll tackle in today’s blog. We consider it a great honor to vote, and while we may not know the final results of the election for days (or even months), what we do know is the election will probably impact the market.
2022 was one of the worst starts to a year ever for stocks, but we remain hopeful that a major low took place in the middle of October, which would be fairly normal given October’s propensity for being a bear market killer.
One of our favorite tables we’ve shared this year is right here. The first few quarters of a midterm year tend to be quite weak when looking at a 4-year presidential cycle, which played out all too well this year. The really good news is some of the best quarters are upon us, so don’t lose faith quite yet.
The Calendar Is a Tailwind
The average midterm year since 1950 corrected 17.1% on average, the most out of the four-year presidential cycle. That’s the bad news, the good news is stocks gained 32.3% on average a year off those lows and have never been lower. Although we don’t know if October 12 is officially the lows or not (but we think it very well could be), there could be a lot of opportunity for bulls over the coming year.
Here’s another look at the same thing, but breaking it down by each year.
Should we be surprised that stocks have had a tough go so far in 2022? Maybe not, as this next chart shows the worst time for stocks is a midterm year under a new President. With the S&P 500 up only 2.4% on average these years, it helps put the disappointing year so far into perspective. Now check out what happens the following year, which might be something many investors could be smiling about soon enough.
One of the most well-known investor axioms is “Sell in May and Go Away,” as those six months are some of the worst of the year. It played out this year, but what we don’t hear nearly as much about is how well stocks tend to do from November through April. Sure enough, looking at those six months during a midterm year and we find that stocks have been higher the past 18 times.
You might hear that certain sectors will do well if so-and-so wins, or that these sectors will do poorly if this-or-that happens. The truth is no one really knows. After President Trump won in 2016 it was widely assumed coal and steel would do great, the opposite happened. Then under President Biden green energy was to do great and dirty crude and coal would struggle – but, again, the opposite happened. It just isn’t clear cut.
What is clear cut is stocks historically have done quite well the year after the midterms. As you can see in our last chart, the S&P 500 gained a year after the election every single time since World War II, with a very solid 14.1% average gain over that year. Why is this? Likely markets hate uncertainty and there is a lot of that leading up to a midterm election. But once the election is over the uncertainty is likely lifted.