In the face of the recent market moves I wanted to share some additional context as it relates to years where there is a US mid-term Election.
The main message being that in the face of the uncertainty that comes with elections, it is not uncommon that markets are shaky in advance of the outcome.
From the standpoint of wealth management and portfolio positioning, this means we do not let these moves derail our plan and rather we should continue to focus on the fact we are invested in quality investments for long term gain. Markets always prefer less uncertainty for the future and the US Mid Terms is at least one item that is contributing to this behaviour at the moment. Once the election occurs and the uncertainty resolves, historically this has provided excellent moves to the upside.
I remain very confident that this is one of the main things at play here in the recent weeks.
Please have a read below and let me know if you have any questions.
Mid-Term Election Year Corrections and Rallies
When reviewing historical data dating back to 1934, Corrections, pullbacks, and volatile market moves are common in the 12-month period leading up to a U.S. midterm election. As you may know, the 2018 U.S. Midterm elections are scheduled for November 6th, 2018.
Historically speaking, when examining performance before and after 21 midterm elections in the US since 1934, the US market demonstrated the following performance:
The S&P 500 pulled back 5% or more in 19 of 21 instances
Corrections of 10% or more occurred on 14 of those occasions, or 67% of the time.
And lastly, corrections of 20% or more occurred 10 times
The average correction was 20.6% over the 21 instances.
(Important to note: Performance is measured from the peak within 12 months prior to the midterm election year market low).
So, it should be no surprise that the S&P 500 has already succumbed to a few pullbacks in this midterm election year, falling 10% from the all-time high in late January through early February and then again more recently after rallying back to new highs. The timing of these moves is always unknown and there is no measure to predict the timing of their occurrence.
More importantly, the midterm election year low has historically been an inflection point for the U.S. market. Turnabouts didn’t always happen immediately after the election; sometimes more volatility occurred and the market rebounded weeks or months later. But once the market got going again, it really jumped. The S&P 500 rallied 47.3%, on average, as measured from the low point reached during the midterm election year to the high in the following year. In 19 of 21 instances, the market surged 25% or more. It traded higher on all 21 occasions since 1934.
There are no clear-cut reasons why the U.S. market tends to struggle at some point during the 12-month period that precedes a midterm election, and then rally smartly after the low has been reached. Analysts often cite the uncertainty about party control of Congress as a factor, as that can impact the country’s fiscal direction and the president’s agenda. Markets don’t like uncertainty, and a shift in control of the House away from the president’s party is possible this year.
But even during the decades-long streak that the Democratic Party had a lock on the House, the midterm seasonal market pattern played out regardless of which party controlled the Senate or occupied the White House.
Perhaps the fear of the unknown is what grips the market, and then once the political landscape shakes out, those fears subside and market conditions improve. After all, earnings growth mainly drives stock prices over the long term, not shifts in party control in Washington. Regardless of how the political landscape shakes out this go around in early November, once the market works past the midterm election period we think it will be more evident that the long-term secular bull market still has legs.