Midterms and market volatility

by: , Chief Investment Officer and Managing Director | IndexIQ

School and Congress are both back in session and while parents may be happy to see their kids heading off to the classroom, investors can’t help but be a little nervous as the midterm Congressional elections loom. At a minimum, it’s bound to be distracting.

Republicans now hold majorities in both the House and the Senate, but the party in power often loses seats in the midterms. Over the past 21 midterm elections, the President’s party has lost an average of 30 seats in the House and four seats in the Senate. In the House, the results have ranged from a gain of nine (Franklin Roosevelt, 1934) to a loss of 63 (Barack Obama, 2010). This, in turn, has generally made it harder for the party in power to get things done. Whether this is a bug, or a feature, depends on what you think of a given administration’s policies.

While the pundits are already out in force predicting this or that outcome, their record in recent elections doesn’t inspire a lot of confidence. Time and again we have seen things that “can’t” happen, happen. One result we can forecast with absolute confidence: uncertainty heading into the first week of November. And markets don’t like uncertainty.

Since markets tend to be forward looking, this nervousness has been most often manifested in September, a typically challenging month for investors whether or not it’s an election year (and mid-term years are often worse). A recent Marketwatch story cited data showing an average market decline (based on the S&P 500 Index) during midterm election years of around 1.4% from the end of August to the early part of October. However, this was followed by some of the market’s best months and a rally through December and into the following spring. Taken as a whole, returns totaled 14.5% from the end of August through the end of the following March, including the mid-term election period.1 Those returns accelerated just before the election, as the uncertainty over the outcome started to lift.

Other periods show similar results. S&P Capital IQ looked at 17 mid-term election periods starting in 1946 and found average returns for the S&P 500 of 17.5% from October to October. Returns were positive in every period.2

One problem with all of this data: the sample size is small. What’s more, the relationship between the two major political parties has been especially combative of late, so it’s always possible this election could be an outlier. Still, the historical data suggests that investors will do well by ignoring any uptick in volatility and sticking with their long-term investment plan.

In the land of the 24-hour news cycle, it’s easy to lose track of the fact that most people go about their daily lives without paying too much attention to politics. Cable news channels create a lot of noise, but their viewership is tiny compared to the size of the electorate. For most people, what matters is their own sense of economic security, and how they view their prospects for the future.

On that front, things should be looking pretty good. Unemployment remains historically low, wages are starting to climb (up 2.8% for the 12-months ending in June, the biggest annual gain since 3Q 2008)3, and the Atlanta Fed’s GDP Now tracker is predicting continued expansion (4.4% 3Q growth as of September 5).4

Elections are stressful. There are winners and losers, shifts in the balance of power, a lot of rhetoric. It’s easy to get caught up in the emotion of it all. But the historical message of the markets is pretty clear: ignore the uncertainty, it’s the economy that matters.

1. Watts, William, “Will midterm elections sink the stock market? Here’s what history says,” MarketWatch, marketwatch.com, September 5, 2018.

2. S&P Global Market Intelligence, S&P Capital IQ, www.capitaliq.com, August, 2018.

3. Mutikani, Lucia, “U.S. consumer spending rises; wage growth slows in second quarter,” Rueters.com, July 31, 2018.

4. Federal Reserve Bank of Atlanta, “GDP Now,” September 5, 2018.

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Salvatore J. Bruno

Chief Investment Officer and Managing Director | IndexIQ

Sal is Chief Investment Officer at IndexIQ, where his primary responsibility includes developing and maintaining the firm’s investment strategies. Sal joined IndexIQ in 2007 from Deutsche Asset Management (DeAM) where he held a number of senior positions

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