Equity markets are generally not influenced by a single factor. It is usually a multitude of factors impacting prices at any given time such as:
- Positive earnings may serve as tailwinds breathing positive momentum into stocks:
- Tariffs could do the opposite and serve as headwinds:
- Leading economic indicators [LEI] may boost investor sentiment and the relative attractiveness of stocks; and
- High valuations could discourage some investors from buying.
At any given time, the confluence of these factors determines the direction of stock prices, in my view.
One factor that gets little attention is mid-term elections. In managing our client’s financial plans and portfolios, as a firm we remain politically agnostic, favoring no party over the other. Our focus is on policy, economic indicators and interest rates and how these items may affect corporate profits and economic growth.
Historically, stocks have tended to get volatile in midterm election years, as the balance of power in Washington undergoes a political shift. The table [1] below lists the S&P 500 corrections during years of midterm elections and then what the market did in the 12 months following the correction.
Since 1962, the average price upswing for stocks following midterm correction was a solid +31%. The table also shows that in the last four midterm election years, stocks have rebounded considerably following the downside volatility incurred during the midterm election year.
Since 1962, the average monthly return of the S&P 500 in midterm election years from April to September has posted negative returns. Midterm election years can mean a shift in the balance of power in Congress, increasing the possibility of change in policy and legislation and equity markets do not like policy uncertainty.
However, once midterm elections happen and the markets know how the table is set, the uncertainty fades and business [i.e. equity markets] have a better idea of what to expect from Congress in the coming two years. The fact is that since 1946, the S&P 500 has not declined in the 12 months following a midterm election. The average price return in the 12 month period following a midterm election from 1950 – 2014 is +15.3% [1].
As a firm, we do not know what will occur from now to December 31 except we am prepared for a noisy and ugly fight in this midterm election cycle which will add to the market’s volatility. However, as mentioned above, equity markets are not influenced by one factor alone. The mudslinging in the midterm elections may create some headwinds for equity markets in 2018; however, beyond 2018, the continued positive news surrounding earnings, jobs, income, and spending may help support the longer-term upward trend.
History has also shown that corrections in the midterm election year are often followed by solid positive returns in the following year. There is no doubt about it that politics these days can stress the markets and we are always here to listen and offer our opinions. Should you have any questions or would like to discuss how your financial plan and portfolio is positioned, do not hesitate to reach out to the office.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
Sources:
Zacks Investment Management: Mitch’s Stock Market Outlook [August 12, 2018]
[1] Strategas Quarterly Review in Chats, July 2, 2018, pages 55-58