What does the stock market have in store after the midterm elections?

Midterm elections, like the one we just had on Nov. 7, tend to have a predictable impact on the stock market. Stocks tend to sell off and volatility increases before the vote, then the market generally calms down and rebounds in the months that follow and in the first half of the following year.

Did this mid-term election have the expected impact? Well, yes and no. In my view, the election has affected market performance and volatility, but to a lesser extent than usual.

Looking back, the stock market has proven once again that it loves predictability and is rocked by uncertainty. About 8 weeks before the midterm elections, the market began pricing in a swing to a Republican majority in the House of Representatives. As investors grew more confident in the outcome of the election — and two years of legislative deadlock in Washington — the market rallied and volatility declined. Relatively speaking, the market reaction has been mixed. The jolt that usually accompanies anticipation of a standoff on Capitol Hill was tempered by worries about the unpredictable economic and political environment. This midterm election had less of an impact on market momentum than usual as inflation, interest rates, a possible recession and the war in Ukraine were catalysts for uncertainty. In fact, Jerome Powell’s comments seemed to have more influence on the market than the outcome of the November vote.

Historically, the S&P 500 has averaged a return of 16.3% in the 12 months following a midterm election. If we see this kind of increase, we will be close to breakeven from the start of 2022. The S&P’s trailing return through November was down about 15%. Right now, I think a 16.3% return is unlikely; however, I believe the US stock market will rise through the end of December and into the first half of next year. There are a few reasons for this. First, the Fed recently said it expects only a few more rate hikes, all of which could be lower than recent jumps of 0.75 points. Second, a divided Congress means a continued stalemate on Capitol Hill. There shouldn’t be any massive changes to tax laws or business regulations to interfere with the bets investors have made on companies and their growth rates.

The general consensus among economists is that a US recession is inevitable, although there are still disagreements about its severity. Speculation of a global recession is growing given ongoing geopolitical tensions, supply chain disruptions, inflation and interest rate hikes. The depth and duration of a global recession could largely depend on how the war in Ukraine unfolds. Whatever happens, I think blue-chip US stocks are likely to be the safest place for investors.

I continue to advise pre-retired and retired clients to invest in large, well-established US companies that regularly pay dividends to their shareholders. These companies are not growing particularly fast, but their relatively low market risk is particularly attractive in the current market environment. Many old-school companies in finance, industrials, consumer packaged goods and utilities have weathered the storm quite well this year. In 2022, blue chip averages outperformed the S&P 500 by the widest margin since 1933. As tech companies have been crushed, they could rebound next year. Investors can make a lot of money in technology, but if you’re looking for predictability and consistency, I just don’t think this is the place to be.

It’s not wise to let election results dictate your decisions, especially if you’re investing for the long term. Elections tend to influence market movements over days and weeks, not months and years. They rarely have an impact on investment performance over a lifetime.

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Sources:

Nasdaq.com – How the Midterm Elections Will Impact the Stock Market

Forbes.com – “3 Ways the Midterm Election Could Impact the Stock Market”

Foreign Affairs.com – “Not just another recession”

Finance.Yahoo.com – “Citi warns that repeat recessions will rock the global economy in 2023”

Wsj.com – “Dow shines as higher rates squeeze Nasdaq tech stocks”

Washingtonpost.com – “Here’s how the midterm elections are affecting your stock portfolio”

Cnbc.com – “Elon Musk Says Fed Needs to Cut Rates Immediately to Stop Severe Recession”