Martha P. from Worcester, MA asks: Hello Mitch, I’m curious if you think the midterm elections are causing any of this volatility, or if you think the election outcome could affect the markets?
Mitch’s Response: Thank you for your question, and it’s a very interesting one particularly when you consider historical trends around midterm election years.
The U.S. equity market has exhibited a fairly consistent pattern in the modern era (post-WWII). From 1962 – 2016, the average midterm election year correction is 19%, with most of the losses historically coming in the summer months.1 Given that this is a midterm election year and the market is currently teetering on the edge of a full-on correction (10% decline), it seems to fit neatly within this historical framework.
__________________________________________________________________________
See How Stocks Deal with Uncertainty
The world is full of uncertainties. In any given year, a steady stream of troubling news can make it seem like the stock market is doomed. But examining history shows that the stock market has thicker skin than most investors do.
Curious just how the market reacted to historical events? Download our just-released guide, “Feeling Bearish? This is How Stocks Deal with Uncertainty.”
If you have $500,000 or more to invest, click on the link below to get your free copy today and learn more about just how resilient the market can be.
Download Our Guide, “Feeling Bearish? This is How Stocks Deal with Uncertainty.”
_________________________________________________________________________
Part of a rationale for why stocks turn volatile in midterm election years, and particularly in the summer months, is that uncertainty starts to build about the balance of power in Washington. The argument is that investors may engage in some hedging ahead of what could be a shift of power in Washington, and what a shift power might mean for laws governing business and property rights.
But before you consider doing some hedging of your own, I’d like for you to consider two things. The first is what stocks have historically done in the 12 months following midterm elections. Using the same historical time frame of 1962 – 2016, we find that stocks have posted an average return of +31.2% in the year following a midterm election. If you wanted to continue the rationale laid out in the previous paragraph, you might say that investors do a bit of hedging as the uncertainty of the election looms, but then once the results are known the pressure eases and stocks have historically recovered briskly.3
At the end of the day, history and statistics matter. But, we should not really rest our investment thesis on what has tended to happen over the course of history. Every year in the stock market is different from the last, and every set of economic circumstances that may drive stock prices is also unique. As investors, we have to assess the current environment based on economic fundamentals, sentiment, and earnings trends in order to determine where stocks may be headed in the next six to twelve months. Elections matter, but in my view the fundamentals matter more.
So, to answer your question directly, I would say that midterm elections are likely playing a role in stock market performance today, but that at the same time investors should not try to time the markets simply because history shows us a pattern that may or may not repeat itself. In my view, your asset allocation/portfolio positioning should reflect your goals, risk tolerance, income needs, and the current fundamental outlook. It should not be based on an election cycle.
Still, history has a way of calming our nerves especially as we face times of volatility. It can also help investors stay focused on the long-term by shining a light on just how resilient the market can be.
To help you do just that, I recommend downloading our just-released guide, “Feeling Bearish? This is How Stocks Deal with Uncertainty.” This guide will show you how the market reacted to historical events.
If you have $500,000 or more to invest, click on the link below to get your free copy today and learn more.
Disclosure