The dust has settled and the midterms are finalized. The Democrats held the Senate while the Republicans took control of the House.
So, what does this mean for markets?
It was clear to see the uncertainty that the midterm elections were bringing into the markets. We had headline after headline regarding different midterm races, what the result may be, and how that all impacts us. Whether we want it to or not, that uncertainty leads to the market being a bit more volatile on the back of uncertainty from investors on what changes the midterm may bring.
However, this is nothing we haven’t seen before. During midterm election years, according to Bloomberg, the S&P 500 averages a return of 0.3%. When compared to the 8.1% that the S&P 500 historical averages per year, it is easy to see the impact that the midterm elections has on markets.
But, we are done with the midterms now. So the question becomes, what might we see after this midterm election year?
The year after the midterm election has tended to be very strong for the stock market. According to PGIM Investments, the S&P 500 has averaged a 15.1% return for the year after midterm elections.
Why is this?
The main reason is the uncertainty that midterm elections bring completely goes away. We know what party holds what part of office and from there have a pretty decent idea of how the next couple years will play out politically. The certainty in the political landscape brings certainty to investors in financial markets which leads to more confidence in investing over the next couple years.
The interesting part is that the average of 15.1% isn’t impacted one way or the other by what party holds what office. We often tend to think if a certain party holds the Presidency, House, or Senate then the market would perform better or worse depending on that set up. However, that doesn’t hold true. The market responds similarly regardless of who holds office. While there can be multiple reasons for this, a lot of it again comes down to certainty. As investors we just want to know who holds the office and what that might mean for us over a two year span.
Ultimately, we will see what next year brings us. If we follow the historical trends we may be looking at a really good year in the market. However, there are always different factors in the market and economy so keeping up to date on those and their potential impact on the market as we go is as important as it always has been.