Every four years, midterm elections for the The Senate and The House of Representatives have the potential to shift control of Congress. While congressional control can have a direct impact on policy, laws and foreign relations, do these elections affect the stock market? 

The correlation between stock market performance and midterm elections is well documented. Since 1946, in 17 out of 19 midterm election years, the market performed better in the six months following an election than it did in the six months leading up to it.

The S&P 500 historically underperforms in the year leading up to the midterm elections. Over the past 60 years, the S&P 500 has performed at an average of 8.1%. However, in the 12 months prior to a midterm election during the past 60 years, the S&P 500 has only averaged 0.3%. Ironically, the opposite occurs post-midterm elections. Over the past 60 years, the S&P 500 has outperformed the market with an average of 16.3% in the 12 months following a midterm election. 

According to US Bank’s analysis of the Stock market’s performance during election seasons over the past 60 years, the strength of the economy is a much more important factor than the midterm election results. The last time the S&P 500 Index produced negative returns during the 12 months after a midterm election was 1939, which was during the Great Depression. Rising inflation creates a valid concern for the market. Stocks are likely to feel the weight of the Fed’s policy to slow down economic growth. 

Liz Ann Sonders, Chief Investment Strategist with Charles Schwab, is doubtful about the market’s post-election performance. According to Sonders, "The combination of high inflation, the war in Ukraine, and a lingering pandemic has already made this cycle unlike prior midterm years.” With so many other forces at play in the market, Sonders cautions against putting too much weight on  historical midterm-year performance.

Markets do not like uncertainty, often election results provide the clarity that allows volatility to settle down and markets to settle up. In short, history suggests investors shouldn’t allow political preference or political uncertainty to dictate their investment decisions.

Tickers to consider: AAU.V, SSVR.V,  CEI,  FRSX, RNAZ, PPCB & TZA

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