RBC Wealth Management recently published the attached special report titled, “Midterm Madness and Markets”, which examines how financial markets tend to perform one year before and one year after midterm elections in the United States. The article begins by discussing the most recent polls, and lays out a prediction for which party is most likely to control the Senate and the House following the election that occurred earlier this week on November 6th. The authors then go on to discuss the implications of the election results, and in particular address the likely impacts to economic growth, future legislation, and trade relations.
What we find to be of particular interest in this article is the historical data presented toward the end, which examines how financial markets have performed, before and after, previous midterm election cycles. It turns out that the S&P 500 U.S. stock market returns in the 12 months prior to midterm elections have historically been pretty poor having experienced an average 20.6% decline. As history has proven, every market setback is temporary and the average decline leading up to the midterm elections are no exception. The good news is that the 12 months following U.S. midterm elections, regardless of the election results, financial markets tend to do very well. Specifically, the average return over the 12 months following the midterm elections has been 47.3%.
The key take-away from this data, is that markets do not like uncertainty. Once midterms (or any election cycle) end, and regardless of which political party comes out on top, markets tend to respond favourably as investors regain confidence that the political climate (and therefore the economy) should be somewhat more predictable moving forward.
This year has been no exception – we saw an approximate 10% correction between late January and mid-February 2018, and another sell-off of approximately 8% last month. It’s impossible to say that the market setbacks we experienced over the past year were directly attributable to the U.S. election cycle, but it is safe to say that the midterm uncertainty had an impact to some extent. More importantly, most economists agree that the underlying economic fundamentals suggest there is no reason to believe we are at a market top. In fact, most economists believe that fundamentals are very strong, which should result in continued economic expansion.
Does this mean we are in for a rebound rally? 12 months from now, we will have the answer to this question with certainty. In the interim, if history is any guide – and it’s the only guide we have – then investors should be quite optimistic about market returns over the next year.
As always, please don’t hesitate to reach out to us with any questions you may have.