3 Reasons Not to Panic as We Approach the Midterm Election
On November 8, 2022, Americans return to the polls to determine which political party will control Congress. While every election brings anxiety to both political parties, this one may seem especially significant given recent market volatility, rapidly rising inflation and general political uncertainty.
However, although the election’s outcome is sure to impact future legislation, it will likely have less influence on the financial markets than many would expect. Why is that?
- Markets don’t follow politics. The economy and the markets don’t care which political party is in charge. They’re impacted by policy, not politics, and care about only one thing — the impact to future earnings.
This assertion is illustrated by the fact that market returns during the Obama and Trump administrations were virtually identical at 16.3% and 16.0%, respectively, which is significantly greater than the 30-year average return of 10.6%. Although many voters had strong opinions about these two political leaders, those who set their political feelings aside and remained invested were rewarded.
The trend holds true over the long run as well. As shown in the chart below, the historical return differential between Republican and Democratic administrations has been virtually nonexistent.
60% Equity/40% Fixed Income Portfolios’ Annual Compound Return
- Markets favor a division of power. Many polls have predicted that Republicans are likely to take control of the House following the 2022 midterm election, while Senate control may be too close to call. While a divided government can make it challenging to pass legislation, it typically leads to market stability.
Why? Because markets don’t like uncertainty. When a single political party has the ability to pass sweeping legislation, markets often respond with volatility. On the flip side, a divided government can lead to political gridlock, which is good for markets because it typically means fewer laws are passed, resulting in less economic change and uncertainty.
- Market volatility leading up to midterm elections typically smooths out. While it’s common for market volatility to increase in the months leading up to a midterm election (uncertainty, remember?), markets typically rebound once the election is decided.
S&P 500 Index Annualized Monthly Volatility Since 1970
In fact, the stock market historically has above average returns looking forward after mid-term elections are complete. As illustrated in the chart below, since 1950, the average one-year return following a midterm election is 15.1% — more than double that of all other years during a similar period. This is a good reminder to remain invested through periods of political uncertainty.
The Bottom Line
Elections are important, and it’s natural to be anxious about the midterm and its future impact on the country. However, regardless of the outcome on November 8, be reassured that although we can’t predict the future, history has shown that being invested in a diversified investment mix in line with one’s individual goals, risk tolerance, timeline and personal financial situation is a sound strategy. Put simply, don’t let your political worries derail your long-term investment strategy.
At Creative Planning, we’re here to help you navigate financial challenges and provide you with peace of mind. If you have any questions about your investment portfolio and how it may be impacted by political and/or economic forces, we’d love to have a conversation. Schedule a call with a member of our team.