I love this time of year. Fall means football, pumpkins, and Christmas is around the corner. Unfortunately, fall can also mean those incessant commercials reminding us that elections are within reach. This year is a midterm election, and it seems unfair to me that with all the things happening in the world, we must also decide our leadership now too! Let’s look at how this may impact the stock market.
Historically, the stock market performs better in the six months after an election than the six months before. This is usually because the public expects more government spending with a new Congress. However, with all the uncertainty in the world nowadays, it can be hard to predict the stock market outcome after midterms. The war in Ukraine and the 40-year-high inflation rate seem to exacerbate the issue.
According to Politico, the Republicans are expected to win the majority in the House of Representatives. In order to win the majority, they need to win five seats in the House and one in the Senate. This doesn’t necessarily mean that the market will improve. Economist Joe Brusuelas explained that, “Historically, investors prefer shared power across the federal government.” An example of this would be in 2010 when President Barack Obama was in office, Congress was split with a Republican House and a Democratic Senate. Between November 2010 to 2014, the S&P surged nearly 70 percent.
All this uncertainty does the market no good, as we’ve seen during the pandemic. There is room for some good news on the horizon. We can hope for those historic good returns in the fourth quarter of 2022 and first quarter of 2023 following the midterms, as I briefly mentioned earlier. The fourth and first quarter returns following a midterm election rise 6.1 percent and 7.5 percent, respectively, on average. Another thing to keep in mind is that no matter what the result is with the midterm elections, it shouldn’t have a huge impact on your investment portfolio or strategy. In fact, it’s economic fundamentals that really drive the market performance surrounding the midterm elections, rather than the results. The Federal Reserve’s tightening of monetary policy to attempt to control inflation will likely have a greater impact on the market compared to whoever wins the election.
To summarize, elections are extremely important. Most people focus on presidential elections, but midterms are vital - especially this year when both houses seem to be up for grabs. It is important to remember that the political landscape is only one of many contributing factors that affect stock market performance. It isn’t as cut and dry as “if this party wins, then the stock market will improve.” It is also important to note that the midterm election will likely impact on the Federal Reserve’s decisions. The current interest rate environment and the resulting impact to inflation is as important, or perhaps more important, than the midterm elections. Nonetheless, it still is important to get out and vote!
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The views depicted in this material are for informational purposes only and are not necessarily those of Cetera Advisor Networks LLC. They should not be considered specific advice or recommendations for any individual.
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.
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