Markets & Midterms

Markets & Midterms

In all my years in business, I have never seen people so divided over politics.  It is one of the things that troubles me most these days.  Truthfully, I am not really concerned about the markets, or the economy as these things are transitory, and will right-size themselves.  Rather, I see the political environment these days becoming increasingly divided and filled with vitriol.  It saddens me when a system that is meant to bring people together is tearing us apart. 

That said, I believe some of this divide comes from misnomers about politics and the economy.  Now, I am certainly not numb to the fact there is much more at stake when we go to vote than simply the economy.  However, this is the area I am most attuned to, and figured why not put some information out there in hopes of further informing us all (including me)?

Markets Leading Up to an Election

For starters, the months leading up to an election tend to be the worst in the markets.  The good news, however, is as you are reading this today, the year following a midterm election has had the markets positive every time since 1950.  Oh, and did I mention this stat has historically proven true REGARDLESS of which party wins?!   

In addition, the best year in the markets has been year 3 in a presidential cycle, while the worst year is year two, according to a Bloomberg study.  Year two has yielded 7.2% average historical returns, while year 3 is a whopping 16.6% average return since 1900.

If you are a democrat this may not be the election you are excited about.  Typically, the sitting President’s party loses house seats during a mid-term election.  If you add in President Biden’s most recent approval rating of 39%, which is on the lower side, it heavily suggests expecting the House and Congress to give up seats. 

On the positive side, if you are a democrat or republican, the good news is the markets much prefer a split government.  As a matter of fact, a Democratic President and Senate with a Republican House, has been the best market combo since 1900, with an average return in the Dow Jones of 13.6%.  Not far behind is a democratic president and a fully republican congress, which averages 13% return.  I believe these are the two most likely circumstances based on research and trends. 

How Politics Impact the Economy

Here is a tidbit that I found interesting, and not shocking.  Politicians do not really impact the economy or growth as much as we like to believe.  As a matter of fact, regardless of who is in office, and what their policies happen to be, economic consumption, business investment, government spending, and annualized percentage change in US GDP are relatively consistent across all parties in power and all time periods.  Think of the political powers as trying to turn a cruise ship in headwinds on choppy water.  The political winds change very slowly.  Interestingly, Fed policy has a much greater impact on markets and the economy than which party is in power.

The summary for the market and your portfolio is that if history repeats itself then 2023 should be a much better year in the markets.  That withstanding, statistically, your best strategy in any political environment has historically been to stay invested through all political changes.  Those that make drastic adjustments based on the majority party generally miss out on massive returns and thus perform much worse. 

The summary for humanity is certainly you have a chance to have your voice heard by getting out and voting today.  There are much bigger issues at play, and as you’ve seen above more personally impactful, than how the elections will impact your portfolio.  All I can do is educate, encourage people to exercise their very American right to vote, and have love for one another (I’m aiming low today haha).  Because at the end of the day don’t we all want the same thing?  To live a wealthy, healthy, and happy life!

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