The midterms are over; what comes next?
The 2018 midterm Congressional elections go in the book as the most expensive ever, with spending on all races coming in at around $5 billion. The run-up to the election was tough on investors, with October seeing a spike in volatility and a drop of around 7% for the S&P 500. But early November produced a bounce, as it became increasingly clear that Democrats would take the House, but Republicans would keep control of the Senate.
Politics aside, there may be some good news in all of this for investors. As the New York Times wrote recently, “The midterms have been consistently good for the market.1” Citing data from Ned Davis Research, the story noted that in midterm election years the S&P 500 has gained a median of 18.4% from September 30, just prior to the election, through June 30th the following year. In non-election years, that number was just 4.9%.
Of course, we live in “interesting” times, and it’s worth keeping in mind that these kinds of historical patterns may have been disrupted by the unusual depth of the financial crisis and the extended nature of the economic recovery, now the second-longest on record. As is true with baseball and stock markets, there is a wealth of data available and what it says depends a lot on what – and which time periods – are measured. Looking at the one-year period following a change of control in the House, one research firm found median returns of just 1.9% going back to 1896. Returns for all midterms – not just those where the House flipped – were more generous, other researchers found.
With billions spent on advertising, social media, and other forms of promotion during this election cycle, it’s been hard to ignore this election even if you wanted to. But as always, investors are generally better served by looking past near-term events and keeping an eye on longer term trends and goals. The good news: nearly all the data shows the markets up over the two-year post midterm period, divided government or not; the disagreement is over how much.
For investors, the relevant concern is the performance of the markets under a divided government. While politicians seem to always be talking about “rolling up their sleeves and getting things done,” markets don’t mind a little gridlock. Investor’s Business Daily ran some numbers and found that the S&P 500 has risen slightly more in the two-year period following the election of a divided Congress – a return of 18.7% compared to an average gain of 16.9%.2
While the pundits are loudly predicting continued contentiousness, there are some areas of potential common ground for the new Congress. One of the most interesting for the markets is infrastructure. The need is clearly there, and both parties broadly support additional spending, though for different reasons. The markets would likely welcome a substantial national investment in roads, bridges, tunnels, airports and other projects, an effort that could both support near-term job creation and longer-term productivity growth.
Politics rolls on, and the focus will quickly shift to the 2020 Presidential election. The past provides a framework for understanding how the markets might behave, but it’s not perfect. (“History doesn’t repeat but it rhymes,” as the saying goes). Over time, the markets tend to tune this noise out to focus on profits and opportunities for growth. Investors should do the same.
1. Somer, Jeff, “The Stock Market Typically Rises After Midterm Elections. This Year Is Anything but Typical.” The New York Times, nytimes.com, November 2, 2018.
2. Graham, Jed, “Why The Split Congress May Be The Best Stock Market Election Outcome,” Investor’s Business Daily, investors.com, November 6, 2018.
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