The Market and Midterm Elections

The 24-hour news cycle has made experts and pundits of all of us in at least two areas, politics and sports. We all know a whole lot about what goes on in D.C., our state capitol, and City Hall, and many of us believe we have a better plan for our hometown pro sports teams and, by the way, missed our calling as a General Manager in the NFL.

Right now we can’t get away from news about what appears to be an historic national election in a couple of weeks. Whether we’re political junkies or the person who would rather eat grass than pay attention to politics, tv, radio, and the print media have kept us immersed in the action in nearly every voting district in the nation.

Regardless of your political preferences, though, I am certain there are a few things that are important to you: providing a nice lifestyle for your family; helping your children achieve their goals; having security from the unforeseen; and, for those of us still working, knowing that at some time you will be able to take it down a gear or retire altogether.

All of these objectives require saving and investing for the future—whether that future is in the next few months or decades away. And when you put money away, you hope to put it somewhere that  a) is better than the mattress; b) out paces inflation; and c) works for you through long-term compounding of interest and re-invested dividends.

Hopes dashed…and raised
The last few years have seemed to subvert that simple plan. The ‘monkey-wrenching’ experience of the 2008-2009 financial crisis and recession (on the heels of the 2000–2002 tech bubble and recession), not to mention the ongoing economic malaise, has blinded many people to the long-term perspective, the essential perspective for investing in the stock market.

Well, I want to offer a morsel of Hope about what may be coming. For whatever reason, U.S midterm elections have typically kicked off a period of strong gains for U.S stock investors. During the year after a November midterm election, average returns for large and small U.S. stocks have been significantly better than the long-term average annual returns for these categories since 1950. (See the table.) That doesn’t guarantee anything, of course; but it shows a remarkable, typical pattern.

And here’s a related bit of Hope from history. Average stock-market returns for the third and fourth years of a President’s term in office, since 1940, are way above those for the first two years. (See the bar graph.) Again, not proof of anything, but a decided pattern over a long period.

Issues…and results
With a host of economic, budget, and tax issues facing the next Congress, government policy on economic matters is arguably more at the center of attention now than at any time in decades, and legislative action over the next couple years may have an important effect on the future of the U.S. stock market. But historical stock-market performance following midterm elections underscores two key points.

First, there are many factors that influence near-term stock movement in addition to election results, particularly the current economic trend and the business-profit cycle.

Second, and this is the zinger, even if elections and legislative actions eventually lead to important policy changes, the midterm election outcomes themselves historically have not appeared to be major determinants of the stock market’s direction. So, at least from a narrow, historical stock market perspective, it doesn’t matter much who wins. Can ya believe it? (That’s not to say the candidates and issues don’t matter, of course. We’re talking only about the stock market here.)

What to do?
The stock market record makes one more argument for sticking to your investment strategies, sticking to them instead of attempting to move in or out of the market—certainly not on the basis of this year’s political events. Remember the central dictum of good financial planning: focus on your situation and objectives, not short-term events.

Now, let’s get back to that election race in Medicine Lake, Montana. And if I were managing the Pittsburgh Steelers right now…

Author: David Jeter, CFP®, Allegheny Financial Group, October 2010

Securities offered through Allegheny Investments, LTD, a registered broker/dealer. Member FINRA/SIPC.
The above comments are provided for discussion purposes only and are not meant to be an offer of any specific investment.