What to Make of Midterm Madness

First, a couple of housekeeping items. Yes, this article addresses the topic of the midterm elections, which arrive on Tuesday, Nov. 8. However, this will not be a commentary on specific candidates or the two major parties.

Rather, the objective here is to examine stocks’ historical performances leading up to and following midterm elections and what Mr. Market might have in store this year. For what it’s worth, the S&P 500 gained 8% in October. Make of that what you will.

Fortunately, t here’s ample history to examine when it comes to stocks’ performances following midterm elections. After all, these events come around every four years. It’s also worth noting that clients and unadvised investors often make more out of electoral outcomes than markets themselves. In other words, elections are a good time for advisors to connect with clients and remind them that financial markets are designed to reflect financial expectations for assets – not be predictive of election results.

With that in mind, here are some tips for advisors to consider highlighting to clients in the weeks after Election Day.

History Lessons and More

As noted above, there’s plenty of history when it comes to midterm elections and that history is relevant though not biblical.

“Historically, some analysis has shown that equity markets have tended to underperform in the runup to midterms and then outperform thereafter,” writes Morningstar analyst Dave Sekera. “This course of events would suggest that investors should underweight equity exposure prior to the election and then move to an overweight afterward. Yet, I suspect that this historical precedent is of little practical value today.”

Of course, advisors need to impart upon politically savvy clients that just how much midterms affect equity market performance is very much a matter of the timeframe being examined – weeks, months, a year, etc.

“In addition, the results will differ greatly depending on how far back in time one measures—different analyses have started during the Great Depression, after World War II, and after 1962,” adds Sekera.” In my opinion, the technical aspects and dynamics of the market today are so different from earlier periods that I would hesitate to use any data prior to 1990.”

Along those lines, recent midterm elections might hold clues as to what clients can expect post-Nov. 8. For example, around the time of the 2002 midterms, markets were still attempting to bottom following carnage in growth stocks. In 2018, the Federal Reserve was boosting interest rates.

Predictions Don’t Matter Much

When it comes to election results, sage advice for advisors and clients alike is realizing that simply because you’re correct about the outcome, that doesn’t mean tangible benefits accrue regarding portfolio performance.

For example, one may be correct that “red” will on Election Day, but that doesn’t mean oil stocks will rally. Conversely, “blue” could be the order of the day, but there are no guarantees renewable energy equities will soar.

“Although one party may control both the executive and legislative branches, numerous factors may limit the scope of what that party will be able to accomplish. Both domestic and economic factors, as well as external geopolitical factors, may arise to derail the attention of the controlling party,” concludes Sekera.

Related: What Are the Chances for a Windfall Profits Tax?