Just the mention of midterm exams brought fear and trepidation to the hearts of many students throughout their high school and college years. The thought that so much of your ultimate grade for a class would hinge on how you did on a single test was nerve-racking. It caused sleepless nights and late-night cramming sessions for many of us.
As we move to the 2022 midterm elections, which are only six months away, many people are feeling the same sense of fear and uncertainty. In our politically charged and divided country, this fear comes from people on both the right and the left side of the aisle.
We will be looking at this throughout the year. We know the upcoming elections will occupy a great amount of political and economic thought online and in the news media. It will also generate an endless stream of political ads that we will have to endure until early November.
We wanted to start by putting some historical data in perspective. Capital Group, the parent company of the American Funds, has researched midterm elections over the last 90 years and found a number of interesting data points. We will share two of them with you below.
The first is that the president’s party typically loses seats (sometimes many, many seats) during a midterm election. This is regardless of whether Democrats or Republicans are in power. There have only been three times in the last 22 midterm elections that the president’s party gained seats in the House.
Source: The American Presidency Project, "Seats in Congress Gained/Lost by the President's Party in Mid-Term Elections.”
This generally happens for a couple of reasons. First, the party that is not in power is very motivated to generate voter turnout to try to regain control of the House and/or the Senate. Secondly, the president’s approval rating typically drops during their first two years in office as they try to enact new legislative agendas and thought processes. We have certainly seen that play out over the last couple of presidencies.
We also know that markets hate uncertainty, and this leads us to the second finding we wanted to share with you today. Stock market returns tend to be flat and volatile in the timeline heading up to a midterm election. This is a different and more pronounced pattern than in the other three years of a presidential cycle, as you can see in our second chart below.
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.
As you can see, the journey that stocks have taken from January through mid-October of typical midterm election years is different than the path they take in all other years. The additional uncertainty we are encountering this year due to persistent and rising inflation, Federal Reserve Bank policy and Russia’s invasion of Ukraine will likely add to the volatility.
The good news is that markets tend to rally as the outcome of the election becomes more clear. The returns from mid-October through the end of the year have been historically one of the best periods of time to be invested. We shall see if this year follows the typical pattern, but we wanted you to be aware.
Knowing that markets could be volatile and choppy throughout the year leads us to a couple of conclusions. First, for those of you with excess cash on the sidelines, this is a great time to be dollar cost averaging into the market. Periodic purchases overtime allows us to reduce our risk of buying at a market highs and average down our cost per share. The second is to remember that the long-term trend of the market has been positive. This has rewarded patient, long-term investors.
Our hope is that keeping the above in mind will help you pass these midterms with less stress and more sleep!! We fully expect that the news and noise of this political year will be deafening. We want you to keep this in perspective so that your plans don’t get blown asunder by the prevailing winds. We think it is important to remind you, our trusted friends and clients, of this as we continue “Moving Life Forward”.
The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.