By Peter Mallouk, JD, MBA, President | December 19th, 2018
Nearly every major market in the world is in correction territory (a drop of 10% or more), and some are in bear market territory (a drop of 20% or more).
There is a lot of uncertainty out there, and the market really dislikes having no idea what is going on. While the biggest factor at present is the tariff issue—with some investors thinking it will resolve quickly, while others think it will go on for many months—there is no question the market has its eye on tomorrow’s elections.
At present, it appears the Democrats will gain seats, particularly in the House. This is common, as over the last 21 midterm elections, the sitting president’s party has lost an average of 30 seats in the House and 4 in the Senate.
Regardless of your political persuasion, the stock market is generally not blue or red. It is, however, quite green. And one thing the market likes is increased certainty. After the election, the markets will have a much clearer picture of many issues impacting investing, including how tax policy, investment policy and regulations may or may not change.
Perhaps this is why it has been normal for the stock market to see far more volatility than normal in a midterm election year, with volatility increasing up to election day. But, let’s focus on what’s more important: what happens after election day. Well, here we have generally great news. Since the 1930s, when Democrats gain seats, the market is up about 14.5% on average over the next 12 months. When Republicans gain seats, the market averages a gain of nearly 11% over the next 12 months. If we can call 1950 the beginning of modern history, the market has averaged a return of 15% over the 12 months following a midterm election, more than double the average market return over the same period in years without midterm elections. And my favorite factoid of all? The last midterm election after which the market lost money over the following 12 months was November 5th, 1946. ¹
Here are the takeaways. First, no one knows what is going to happen in the stock market, and anyone that claims to is someone you should avoid. We do know that over 12 month periods, the market is positive about 76% of the time, pretty good odds. We also know that there are many variables that go into market performance, from unemployment to tax policy to sentiment and on and on. We also know that the markets respond favorably when uncertainty is removed. This is why most believe that once the tariff issues are resolved, regardless of how they are resolved, the markets will likely respond positively. And finally, we know midterms tend to move against the party in power, which encourages gridlock, removing uncertainty. Historically, the market has responded very favorably over the 12 months following a midterm election. While we won’t suggest that what has happened in the past will repeat itself; it is, at a minimum, a clear indication that regardless of the outcome of the election, a wise investor will stick with their long-term investment plan.
¹Actually my favorite factoid is that 7% of Americans think chocolate milk comes from brown cows, followed closely by the fact that almost 3% of the ice in the Antarctic glaciers is penguin urine, but neither of these really fit in here.
Peter Mallouk is the President of Creative Planning, LLC. and its affiliated companies. Creative Planning provides comprehensive wealth management services to clients. These offerings include investment management, financial planning, charitable planning, retirement plan consulting, tax services and estate planning services.