Political ads are finally over, for now, and the US midterm elections on November 6th resulted in a divided government—the widely expected outcome—with the Democratic Party gaining control of the House of Representatives while the Republican Party maintained their majority in the Senate. We believe the markets were largely priced for this outcome and therefore expect limited effect on market volatility. In general, the markets care more about fundamentals and policies than politics, with markets showing greater resilience towards political events or rhetoric that produce little action. With that being said, looking back historically, there is a compelling pattern of stock market trends that gives us a reason to be optimistic for the next quarter and into 2019. Below are 5 charts relating to midterm year stock performance history, as well as specific data on average returns after a split congress outcome.
Chart 1 – Most equity gains tend to happen late in the year during a midterm year.
Chart 2 – Since 1946, the S&P 500 Index has been higher 12 months after every single midterm election. That’s 18 for 18.
Chart 3 – The S&P 500’s closing low for the month of October was October 29. Since 1950 in mid-term election years, the S&P 500 gained more than 10% on average from the October low close until the end of the year.
Chart 4 – Under a Republican president, the best scenario for stocks has been a split Congress.
Chart 5 – The fourth quarter of a midterm year historically have been the best quarter of the four-year presidential cycle. Not to be outdone, the next two quarters have been quite strong as well.
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