While most have focused on the macro risks facing the bull market, there’s an overlooked reason why the market has been wobbly: the midterm elections. This is normal behavior for midterm election years and the market should maneuver past any potential pitfalls.
For months bulls and bears have faced off on a number of macro issues from inflation jitters to protectionism and tariff risks, to Washington drama, and more…
A handful of these issues sparked a 10% correction in the S&P 500 and pressured markets outside of the U.S. from late January through early February. While equities have bounced back since then, they are still wobbly and reactive to the macro risks du jour that tend to drift on and off the radar screen and then back on again. However, it’s not only these macro risks that have been constraining equities in 2018. More importantly, an overlooked factor is also pressuring stock prices: the U.S. midterm elections looming in November.
U.S. market typically corrects ahead of time and improves meaningfully after the midterm election year low has been established. S&P 500 pulled back 5% or more ahead of 19 of 21 midterm elections since 1934. It declined 10% or more on 14 of those occasions, or 67% of the time. The S&P 500 corrected by an average of 20.6% over the 21 instances. So, it should be no surprise that the S&P 500 has already succumbed to a pullback in this midterm election year.
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.
It seems history would argue to buy into any midterm election year turbulence.
Tim