How Do Midterm Elections Affect the Stock Market?

Rick Prime, CFP®

Election Day has passed by once again. Every two years our elections determine the state representation in the US House of Representatives and the Senate. While the outcomes of this years midterm elections still remain somewhat uncertain, one thing we can count on is that there will be plenty of opinions and predictions floated about the impact on the financial markets.

Regardless of pundit predictions, the data remain consistent. Since 1950, there have been 18 midterm election cycles, and in each following year the stock market has shown positive returns.

The conventional theory is that midterms result in a more divided government, so less is done. Market investors think government gridlock is good because it means fewer changes, and anytime there’s less uncertainty, it boosts investor sentiment.

I believe the answer is even more simple. Shareholders invest in companies, not one political party or another. On average, stocks have trended up over time regardless of the political party in control or even with a divided Congress.

There are larger factors than Congress controlling stock prices, including interest rates, economic cycles, global trade, inflation, natural disasters, wars, and corporate profits.

The following chart shows the stock market and its performance under each party’s control of Congress and Senate since 1926:

The above illustration shows both parties have periods of significant growth with some declines mixed in during their time of majority rule. Past performance is not a guarantee of future results. However, there does not appear to be a pattern of stronger returns when any specific party is in control of Congress, or when there is mixed control for that matter. 

As investors, we cannot control the elections. What we can control is sticking to a disciplined approach that optimizes returns over longer periods of time based the science and less on our emotions. As always, if you should have any further questions, please contact an advisor at HFG Trust.

 

Rick Prime, CFP®

Financial Advisor