Mid-term Elections & Market Results

As we approach the November 2022 mid-term elections, investors may wonder whether the market will rise or fall based on who is elected.

Although major events and stock market movements may be related, it can be challenging to determine correlations. Many factors influence stock prices. Politics seems to be just another one of those factors, rather than the factor.

Also, stock prices don't always move in the direction that investors expect. It’s not enough to identify major events in advance; you must also accurately predict how markets will react. This is especially difficult with opinion-laced political news. Accordingly, there is a strong case for investors to rely on patience and portfolio structure rather than political predictions to pursue investment returns.

Markets Have Rewarded Investors Under a Variety of Congresses

HYPOTHETICAL GROWTH OF $1 INVESTED IN THE U.S. Stock Market (AND Showing PARTY CONTROL OF CONGRESS)

The chart below shows the results of Congressional elections and market returns over time. 

Past performance is not a guarantee of future results. "U.S. Stock Market" as represented by the S&P 500 Index. January 1926 - December 2021. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Source: S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Markets have provided positive returns regardless of which party is in power, and even when there is mixed control of Congress.

If there is a pattern, on average, market returns have been positive both in election years and the subsequent year. There is no telling if that pattern will hold true again this fall.

Politics Is A Factor, Not The Factor

It may be helpful to think of the stock market as a powerful information-processing machine. The impact of millions of investors placing billions of dollars worth of trades each day results in market prices that incorporate the expectations of those investors. US elections have an impact on market returns, but so do hundreds, if not thousands, of other factors—the actions of individuals, businesses, foreign leaders, a global pandemic, changes to interest rates, inflation, rising and falling oil prices, and technological advances, just to name a few.

While surprises can and do happen in elections, the surprises don’t always lead to clear-cut outcomes for investors. The 2016 presidential election served as an example of this. There were a variety of opinions about how the Trump-Clinton election would impact markets, but many articles at the time posited that stocks would fall if Trump were elected.¹ The day following Trump’s election, the U.S. Stock Market closed 1.1% higher. So, even if an investor would have correctly predicted the election outcome (which was not apparent in pre-election polling), there is no guarantee that they would have predicted the correct directional move.

What's An Investor To Do?

Trying to make investment decisions based on the outcome of elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely be the result of random luck. At worst, it can lead to costly mistakes. 

That does not mean election-related events won’t cause uncertainty. Uncertainty might even increase for a time. But for those that can keep politics and investment policy separate there tend to be brighter days ahead. 

Stocks have rewarded disciplined investors through Democratic and Republican administrations. A well-structured portfolio should be built to see multiple election cycles through and expect to come out ahead.

The Sage of Omaha can say it much more succinctly: 

If you mix politics with your investment decisions, you’re making a big mistake.

Don't allow your finances to add more uncertainty to your life than necessary. If we can help, let's start a conversation today.