With 2022 being a midterm election year, it is interesting to look back over the years at how the equity markets have fared as both parties vie for additional seats in Congress. However, it should be noted that while it is interesting to look at the trends for midterm election years, the information does not provide the basis for a strategy for trading in and out of the market, nor should trading be based on political views or beliefs during a midterm election year, or for that matter, any year.
A recent study by analysts at the Capital Group*, an investment management firm and mutual fund provider, indicates that during the first several months of a midterm election year, equities tend to experience more volatility and muted returns. However, as election day draws closer, equities typically resume their upward trajectory.
Sources: Capital Group, RIMES, Standard & Poor’s. The chart shows the average trajectory of equity returns throughout midterm election years compared to non-midterm election years. Each point on the lines represents the average year-to-date return as of that particular month and day and is calculated using daily price returns from 1/1/31–12/31/21.
The higher volatility could be, at least in part, a product of politicians spending a lot of time drawing attention to problems facing the country. Campaigns also increasingly employ negative messaging. Those factors coupled with the fact that markets don’t like uncertainty have resulted in midterm election years having a median standard deviation in terms of the difference between the high and low points of 16 percent compared to 13 percent for other years. Case in point: Market volatility was greater in January 2022 than what we experienced in all of 2021.
Sources: Capital Group, RIMES, Standard & Poor’s. As of 12/31/21. Volatility is calculated using the standard deviation of daily returns for each individual month. Standard deviation is a measure of how returns over time have varied from the average. A lower number signifies lower volatility. Median volatility for each month is displayed on an annualized basis.
In terms of gains and losses, the market generally performs well the year following a midterm election. The average performance of the S&P 500 in years after midterm elections since 1950 has been a gain of 15 percent versus an average gain of 7.1 percent for all other years.
Sources: Capital Group, RIMES, Standard & Poor’s. Calculations use Election Day as the starting date in all election years and November 5th as a proxy for the starting date in other years. Only midterm election years are shown in the chart. As of 12/31/21.
Finally, if you consider yourself a member of a political party, and your party loses seats this midterm election cycle, you can take solace in the fact that historically markets have risen over the long-term regardless of the political makeup of Washington, D.C.
Sources: Capital Group, Strategas. As of December 31, 2021. Unified government indicates control of the White House, House and Senate by the same political party. Unified Congress indicates control of the House and Senate by the same party, but control of the White House by a different party. Split Congress indicates control of the House and Senate by different parties, regardless of White House control.
Column 1: Unified government indicates control of the White House, House and Senate by the same political party.
Colum 2: Unified Congress indicates control of the House and Senate by the same party, but control of the White House by a different party.
Colum 3: Split Congress indicates control of the House and Senate by different parties, regardless of White House control.
Sources: Capital Group, Strategas
The composite of data provides for a few key takeaways. Midterm elections, and politics as a whole, can generate a great deal of noise and uncertainty. Disciplined investors know to look past short-term volatility—and noise—and build a diversified portfolio comprised of stocks, bonds, real assets, and alternatives that takes their risk tolerance and time horizon into consideration. Doing so will help investors navigate market volatility in years with as well as those without political elections.
* Source: Capital Group: “Can midterm elections move markets? 5 charts to watch” by Matt Miller & Chris Buchbinder
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