Midterm elections are fast approaching – how will the markets respond?
Historically, the vast majority of midterm elections have led to a 6 month bump in market performance. Why? One theory is that investors have a renewed confidence in the economy after the new Congressional spending plans. With the promise of more money being spent by the government, investors feel more comfortable in market performance.
Another idea is that, after midterms, there is a shift in the Congressional demographics. The more balanced Congress feels, the more positively markets react, because investors look for stability.
What will this year look like, and can we expect another bump in market performance?
Midterm Elections: The 2022 Difference
Of the 19 midterms recorded since 1946, 17 midterms led to a positive response in the markets. But 2022 might be one of the rare exceptions.
First, this is not your average economic year. We are dealing with steep inflation, record high interest rates, global instability and political tensions, none of which leads to market stability. Regardless of the outcome of this year’s midterms, it could be a challenge for the markets to rally.
Even though we’ve seen several rate hikes already this year, the Fed has signaled that there are more to come. This makes sense, given that high levels of inflation are persisting. But it has also led to stock downturns ahead of midterms, which could be difficult to come back from.
What’s Next for Investors?
Regardless of what effects the midterm elections have on the markets, it’s best to take it all with a grain of salt. U.S. and global markets are wavering a lot right now, and there’s plenty of other factors at play that are affecting their performance.
According to the chart below from Dimensional, it doesn’t really matter who has control of congress in terms of returns. Both parties have experienced groth and downturns during their majority rule. Markets have delivered returns over the long term no matter which party was in power.
I’ve written before about why timing the market doesn’t work well, and this is a prime example. Historically, post-midterm markets enjoy a boost, but this year may very well be different. With so much going on, plus an already burdened market, it might be best to hold steady and avoid any knee-jerk actions.
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