With the midterm election now in the rearview mirror, what do the results tell us about what to expect in markets moving forward?
There’s been no shortage of headline noise over the past week, which can make it feel like something unusual is happening. However, aside from some talking points to bring up at Thanksgiving dinner, the data suggests otherwise.
The heightened volatility we’ve seen in recent weeks can be unnerving, but volatility is normal in midterm years. Of the four years in a presidential term, midterm years have had the deepest pullbacks on average. This is largely due to a heightened amount of uncertainty in markets leading up to the event.
Despite the headwinds during midterm years, once the elections have passed, markets tend to settle down. The fourth quarter has actually been strongest in midterm years, reversing course from some of the pressure generally experienced earlier on.
Zooming out even further, the S&P 500 was higher by the halfway point of the following year after all 19 midterm elections since 1950, with an average gain of about 15.5%. The range has been wide, from 2.5% after the 2014 midterms to 29.1% after 1954, but the direction has been consistent.
While this is great for midterms in general, what does it mean for this year’s results? While there’s no way to predict exactly what the coming months will look like, this year’s outcome (a Republican president with Democrats winning both chambers of Congress) has happened seven times since 1954. In all seven instances, the S&P 500 was higher one year after Election Day, with an average gain of 15.5%.
This year’s volatility has been well within the normal range for a midterm year. There may still be some bumps ahead, but markets have historically calmed down once the midterms are behind them. Over the longer run, fundamentals like earnings and rates drive the trend, not the headline noise.
– The Aspire Wealth Team
