I love fall! But one thing I don’t look forward to is the midterm elections and the hateful ads that infiltrate the media during this time of year. But unless I want to run for office (which I do not!), the only thing I can do to initiate any governmental change is to VOTE, and I encourage you to do just that!
Another step you may want to take during this time is to look over your portfolio to see if you need to make any changes/additions/deletions to investments that may be affected by the outcome of the midterm elections.
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The good news, as you can see in the chart below, according to research by Truist, “Every midterm election year since 1946 has been followed by positive one-year stock returns. The biggest gain after a midterm election year was in 1954, at 34%. The average one-year gain has tallied 14.4%.”
Source: Truist
They went on to say, “Since 1950, the S&P 500 has gained an average of 6.6% during the fourth quarter of midterm-election years and advanced 84% of the time.”
I like hearing that!
Of course, that’s not the end of the story. Historically, stock market returns have also differed according to the make-up of Congress and which party may come out ahead.
U.S. Bank reports, “As of September 28, the House included 218 Republicans, 214 Democrats, one independent and two vacancies, while the Senate included 53 Republicans, 45 Democrats and two independents who caucus with Democrats.”
The following table of election outcomes vs. stock market returns reflects their findings.
| White House + Congress Control | Outcome | Average 3-Month S&P 500 Return During Period | Average 3-Month Return Relative to All Periods |
| D + D | One Party (D) | 2.20% | -0.07% |
| D + R | Divided | 3.85% | 1.57% |
| D + Split | Divided | 4.24% | 1.97% |
| R + D | Divided | 1.19% | -1.08% |
| R + R | One Party (R) | 2.89% | 0.62% |
| R + Split | Divided | 1.62% | -0.66% |
| All One Party | 2.42% | 0.15% | |
| Mixed Control | 2.17% | -0.10% |
Source: U.S. Bank
As you can see, for the most part, a divided Congress is better for investors. No one knows how this year’s elections will turn out, since the polls have proven seriously deficient in the past few elections. So, right now, it’s a guessing game.
Additional fun facts that sound positive for the markets, according to Fidelity:
Fourth-quarter rally: October and November average some of the strongest monthly returns of the four-year presidential cycle.
Congressional control scenarios: Gridlock (Split Congress) is often favored by markets as it reduces sweeping, disruptive policy changes.
Markets have responded more to changing levels of policy uncertainty rather than which party wins or loses.
But I can tell you that depending on which party wins the most seats, there is likely to be some governmental action that will affect the economy and the stock market.
U.S. Bank estimates that a Democratic House is the most likely outcome, which would make broad legislation harder to pass. Their next most likely scenario is Democratic control of the House and Senate, which could “block legislative priorities,” while Republicans maintaining full control of all three branches would give the White House “a clearer path for legislative priorities.”
Of course, there are a couple of other issues that the bank pointed out that may also affect the direction of both the economy and the markets.
Inflation and rate hikes. We’ve just seen our first rate hike by the Federal Reserve since July 2023. Inflation remains at a stubborn 3.4%, well above the Fed’s 2% target. Both of those factors weigh on economic strength, which eventually affects companies’ earnings. Right now, that has not been an issue, as FactSet reports that third-quarter earnings for the S&P 500 Index are expected to grow at a rate of 29.5%. But these are issues that need to be considered when reviewing your portfolio.
U.S. Bank also noted that there were numerous years where the economy overrode the impact of the election, specifically highlighting years that featured high inflation and rate hikes, with the 1990 results also affected by the Savings & Loan crisis and the invasion of Kuwait by Iraq.
1946 -10.9%
1966 -13.2%
1970 -14.4%
1990 -7.5%
2022 -14.6%
Returns cover the 12 months before each election.
War and policy shocks. Currently, we are afflicted by the Russia/Ukraine never-ending war (and don’t be surprised by additional repercussions as Russia continues a campaign of sneaking into other NATO countries), as well as the Iran War, which has sent fuel prices soaring in the U.S., significantly hurting consumer pocketbooks, and leaving less money for investment.
The Heritage Foundation noted this: “Sixth-year midterm elections tend to land a gut-punch on the party that has the White House. Presidents from Franklin Roosevelt (lost 72 seats) to Harry Truman (lost 28) and Dwight Eisenhower (lost 48) have suffered voter wrath in the sixth-year midterm elections.”
The one thing I know to be true is that markets don’t like uncertainty. Consequently, once the election is over, we’ll have a better understanding of which sectors and investment styles have the most potential.
In the meantime, here are a few portfolio tips to help you weather the next few weeks:
- Reassess your near-, mid-, and long-term financial goals
- Evaluate your risk tolerance
- Consider rebalancing your portfolio to make sure it is adequately diversified
- Emotions have no place in investing; it’s ok to love the company but not the stock!
3 ETFS for the Midterms
I don’t have a crystal ball to predict the election results, but here are three ETFs with Buy ratings that look attractive at this time:
State Street SPDR S&P Semiconductor ETF (XSD)
State Street Multi-Asset Real Return ETF (RLY)
State Street S&P 500 Energy Select Sector SPDR ETF (XLE)
Happy investing, and don’t forget to VOTE!
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