by Paul Dietrich, CEO Fairfax Global Markets, November 5. 2018
Midterm Voting Uncertainty Always Results in Stock Market Gains by Year End!
Based on data from FiveThirtyEight, Democrats currently have an 85% chance of taking control of the House and Republicans have an 84.1% chance of holding control of the Senate. (Source: FiveThirtyEight, November 4, 2018.)
A House and Senate controlled by different parties are now almost inevitable.
How Will That Affect Stock Market Performance?
I have just completed a study of stock market performance after all midterm elections from 1950 to 2014—the last midterm election.
Since 1950, there have been 16 midterm elections.
The study’s findings were surprising!
For Each Of The Past 16 Midterm Elections, Stocks Have ALWAYS Climbed Higher A Year Later.
100% of the time!
It didn’t seem to matter whether they were Republican or Democratic Presidents with a divided Congress, the stock market climbed higher every time.
The Stock Market Performance Results Were Stunning!
Since 1950, stock market performance has gone up an average of 17.5% in the year after a midterm election. In other words, if investors had bought the S&P 500 Index just before each midterm election and held it for a year, they’d have made money 100% of the time.
If one measures from the yearly midterm lows, the results are even better. From their midterm lows, stocks increased an average of 32% over the next 12 months.
Leading up to the midterms, U.S. stocks have historically performed poorly. From January to October in midterm election years, they drop an average of roughly -1%.
In all other years, stocks have roughly increased by about +7% in that timeframe.
2018 has perfectly fit this stock market pattern. For all the market’s volatility in the past few weeks, the S&P is roughly flat year-to-date. If history is a guide, we should expect the market to surge in November after the uncertainty of the elections is behind us.
Historically, The Third Year Of A Presidential Term Is The Strongest Year For Stocks.
Regardless of which side has won in a November midterm election, the stock market has always prospered for the rest of the year and excelled in the next calendar year. Typically the best year for stocks is the third year of a presidential term, in what is often called the four-year presidential cycle.
The third year of a president’s term, like 2019, hasn’t ever been negative from 1950 to 2014. Analysts believe it is all about the rising uncertainty heading into the midterms followed by falling uncertainty after.
According to the Stock Trader’s Almanac, the average annual gain of the Dow Jones Industrial average in each year of a presidential term, going back to the beginning of the 20th century: 6.2% for Year 1, 4% for Year 2 (which this midterm year would be), 12.4% for Year 3 and 7.5% for Year 4.
A quick look at historical performance shows that stocks often decline in September before a midterm election. The stock market hates uncertainty, and many analysts believe the cause of this uncertainty is the fact that typically the incumbent president’s party loses seats in Congress. That same look at historical performance shows that stocks tend to do just fine as Election Day nears and in the aftermath of the vote, regardless of the outcome, as uncertainty begins to fade.
A recent UBS study (summarized in the chart above) concluded that the S&P 500 index–had gained 15.3%, on average, in the six months following a midterm election in the third year of a presidential term, which is the case this year with President Trump. Midterm elections are scheduled for Tuesday, November 6th, this would roughly translate to the period of November 2018 to April 2019.
Why The Stock Market Loves Gridlock!
It does not matter which party was in charge before or after the midterm election. The removal of uncertainty and of constant media attention allows markets to resume focusing on economic fundamentals
Historically, the president’s party usually loses some power to the opposition in midterms. That tends to move us toward gridlock. People hate gridlock. But Wall Street and stock markets love it because it reduces the risk of political upheaval.
Gridlock in Washington would prevent the government from enacting new policies and keeping the status quo—at least from Wall Street’s perspective. A split decision from the midterms would probably keep America’s fiscal, trade and regulatory policies on the same trajectory. It is highly unlikely that any market-moving legislation is likely to pass through a divided Congress.
Would The Impeachment Of Donald Trump By A Democratic House Negatively Affect The Stock Market?
A number of TV analysts have suggested that a Democratic-controlled House of Representatives could initiate impeachment proceedings against President Trump and that would hurt the stock market.
But if we look at the one recent historical precedent—that is unlikely. The impeachment of Bill Clinton was initiated by the House of Representatives in December 1998 and led to a trial in the U.S. Senate on two charges, one of perjury and one count of obstruction of justice. The Senate, subsequently acquitted Clinton on February 12, 1999.
During the impeachment and trial of Bill Clinton, the S&P 500 Index went up +6.23%
Impeachment is NOT necessarily negative for the stock market!