The Perhaps Counter-Intuitive Market Effects of Midterm ElectionsAdvice to the Advisor
If the media firestorms that surrounded the 2018 upcoming midterm elections caused your phone lines to burn up with client inquiries and dire imaginings, you can in good conscience follow the old family doctor “take-two-aspirin-and-call-me-in-the-morning” approach, recommending they look at historical performance data for this very season: “A quick look at historical performance shows that stocks often see rough sledding in the September and October of years that feature midterm elections,” MarketWatch comments, adding that “it isn’t clear that the midterm congressional elections on Nov. 6 … would be enough to derail the bull market.”
To be sure, one thing that has characterized midterm seasons, Sheaff Brock Managing Director Dave Gilreath notes, is greater stock price volatility. In fact, he notes, midterm years have been 18% more volatile than the average. The flip side of the pattern is that, based on data going back 14 cycles, in the year after a midterm election, the S&P has climbed an average of more than 31% from the correction low.
Interesting … It matters little which party was in charge before or after the midterm. Apparently it’s the removal of uncertainty that allows markets to resume focusing on fundamentals, analysts posit.
“There’s a reason why investors salivate when midterm elections cycle through,” cnbc.com commented four years ago. “It’s been a very bullish catalyst for the markets and has been for decades.” On average, the S&P 500’s return between October 31 of the midterm year and October 31 of the following year has been an eye-popping 15.3%”!
Sheaff Brock’s Gilreath isn’t either fazed or amazed about the 2018 midterm election season. “It’s all about the economy, he realizes, and the economy is strong. In fact, stocks are cheaper now than they were at the start of the year, he points out. The average forward P/E ratio for the S&P 500 is 16, (“and that’s not high at all,” he observes), and corporate earnings are up 25% this year.
One of several resources the firm utilizes for research, the Strategas “Bull Market Top Checklist,” Gilreath points out, affirms the message of underlying strength in the current stock market as midterm elections approach, suggesting that “real trouble is a long way off.”