A Prediction for Post-Election Markets, No Tea Leaves Required
by Brandon Miller on Oct 31, 2022
A Prediction for Post-Election Markets, No Tea Leaves Required
Presented by Brio Financial Group
Just outside Placerville when you’re heading up to South Lake Tahoe is a hard-to-miss Paul Bunyan statue towering over a tiny enclave of businesses. Cool as that is, I’m more intrigued by the psychic advertised on a big white sign with red lettering. I’ve always wonder about the customers. Are they mostly townspeople seeking clarity about beaus, life decisions, and lost loved ones? Or tourists wondering if they should buy an Epic ski pass this year?
It’s human nature to want answers to questions that weigh on us. And a big unknown right now is what the midterm elections will bring. How will the markets react and how does that impact your portfolio?
Rather than turn to a crystal ball, I think it’s more apt to look at the past to predict what generally happens in midterm years. It’s well known that the markets hate uncertainty and the months prior to an election are full of anxiety and conjecture. That could be why Year 2 of a president’s term has proven over the years to create greater variability of returns than in other years.1 And that market volatility makes sense when you think about everything that goes on.
Two years in, folks have had enough time to form an opinion about the President and they generally don’t like what they see so give the out-of-office party more seats. Of course, the telenovela-worthy plot twists of the last few months might mean this midterm goes against the grain.
Not much legislation gets done in the lead-up to an election. Two-year terms mean House representatives are back home campaigning for their re-election, and there are also 35 Senate seats up for grabs this year. With the current 50–50 split in the upper chamber, each race takes on greater importance.
The sidetracked legislation in midterm years includes federal spending bills that fund things such as research, military budgets, and more. That can also mean less money funneling into businesses from government contracts. So, everybody’s preoccupied and nobody’s happy during this time, which helps explain why Qs 2 and 3 in midterm years are historically the only two quarters that the market shows negative returns out of the 16 in a presidential cycle.1
After the election results are known, the markets typically calm down and legislation and spending begin to flow again. Organizations can now prepare for the congressional makeup that will rule the next two years and what they might be able to accomplish. Not surprisingly, the fourth quarter of Year 2 and the first quarter of Year 3 are historically the best-performing quarters out of a president’s 16.1
Which leads us to, what do the results potentially mean for you and your portfolio? What will likely happen if the Democratic party keeps complete control of Congress? Alternatively, what about if the Republican party takes one or both houses?
Here again, history gives us a possible likely answer. Since World War II, we have had a divided government 60% of the time, a united Republican administration 11% of the time and a united Democratic administration 29% of the time. On average during these years, the S&P 500 has delivered a 7.9% return with a divided government, a 12.9% return with all Republicans and a 9.9% return with all Democrats.2
Of course, the stock market is different from Main Street, so GDP is probably better than stocks for demonstrating what’s really happening, particularly because it takes employment and hiring trends into account. Again, since WWII, GDP consistently shows an upward trend, growing an average of 2.7% with divided administrations, 2.8% with Republican control, and 4.0% with Democratic control.2
So really what history shows us is that, regardless of who is in control of the executive and legislative branches of government in Washington, the stock market and GDP typically still grow.
I hope this knowledge frees you from ever thinking about how a candidate can beef up your portfolio and instead lets you focus on supporting those who advance the social issues you care about most. Because history demonstrates that it’s likely you will win economically whoever wins the election. But socially, legislative control can have more impact on your life.
So stop worrying about the election. There, now you can use your psychic reading for more important issues.
1Source: CFRA, S&P Global. Past performance is not guarantee of future results. Data as of 6/30/22.
2Source: FactSet, Office of the President, J.P.Morgan Asset Management; Standard & Poors’s; percentages reflect S&P 500 price returns.Returns are year-to-date as of March 31, 2022. Guide to the Markets—U.S. Data are as of May 31, 2022.
Brio does not provide tax or legal advice, and nothing contained in these materials should be taken as such. The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
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