Webcast #41: What the Market Historically Does Before and After U.S. Midterm Elections (5 minutes)

U.S. midterm elections take place in just over six weeks on November 8. If the polling is accurate, which lately it hasn’t been, and the forecasts come to fruition, there’s a 70% likelihood that the Democrats will secure a majority in the Senate and the Republicans will win the most seats in the House.

In other words, we’re expecting a divided Congress.

The market historically trades down leading up to midterm election results and then rallies thereafter once the veil of uncertainty has lifted. In fact, going all the way back to 1944, while the May to October period produced an average decline of about -1%, the market then surged +14% from November to April following midterms. In fact, the market was positive 95% of the time in those six months following the certainty of the election results.

Since 1944, the market performed best under a Democratic President and a divided Congress (+13.6%, on average). The second-best situation was when a Democratic President dealt with the checks and balances of a unified Republican Congress (+13.0%, on average). In case you were wondering, the worst combination has been a Republican President with a unified Democratic Congress (+4.9%, on average).

Inflation is today’s top concern for market participants. The latest reading showed that prices (including food and energy) rose +8.3% in August compared to the year before. Though government gridlock in Washington may accompany more partisan bickering, it will also prevent politicians from passing more and more spending bills into law that add fuel to the fire of inflation.

Less government spending will assist its central bank to bring down inflation.

In addition to the certainty that the U.S. midterm election results will bring, which the market historically cheers, if ever there was a time when government gridlock would be a welcomed development, it’s at a time when inflation is running at a forty year high.