The issues in this election are enormous, and the vast differences between the two political parties are well chronicled.
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Yet, for the stock market, history suggests that the outcome of the elections may not matter much. Shocking though this may be, since 1950, the midterm elections have brought an upturn for stocks, no matter which party has won, and no matter the issues.
The market has generally flagged in the months before the midterms and prospered after them. And it has often excelled in the year after the midterms, typically the best of the four-year presidential cycle.
Ned Davis Research, an independent investment research firm, compared stock returns for 1948 through 2021, broken down by the four years of a standard presidential term. It used the S&P 500 and a predecessor index:
12.9 percent for Year 1.
6.2 percent for Year 2, the year of the midterms.
16.7 percent for Year 3, the year after the midterms.
7.3 percent for Year 4.
The data was similar for the Dow Jones industrial average going back to 1900.
But why? There is no certain answer — and it could even be a series of coincidences — though there are plenty of explanations. The one I prefer is that presidents are politicians who try to stimulate the economy — and, indirectly, bolster stocks — for maximum effect in presidential elections.
Their first year in office is the best time to make politically painful moves, which often lead to weak markets by the time the midterms come around. After losses in the midterms, though, presidents try to give the economy a surge through expansionary fiscal and monetary policy, setting themselves (or their successors) up well for the election.
Is This an Exception?
Two powerful factors — the negative effect of a slowing economy and the beneficial influence of the midterm elections — may be in conflict, Ed Clissold, the chief U.S. strategist of Ned Davis Research, said in an interview.
On the positive side for stocks, Wall Street usually responds well to gridlock — the stasis that can grip Washington when power is divided — and such a division is the consensus expectation for the midterms. But, over the last century, when bear markets have been associated with recessions, no bear market has ever ended before a recession started, Mr. Clissold has found. The last time there was a recession in the year following the midterms occurred after the 1930 elections, during the Great Depression, a terrible era for stocks and the economy.