It’s probably safe to say that a lot of us are counting down the days till November 6, when we have the chance to vote for who we want representing us in Congress. When it comes to investing strategies, however, we’re better off ignoring the big day (and weeks leading up to it) completely.
Why? How have elections affected stocks in the past?
Upcoming midterm elections can make for a choppy fall market.
Since 1950, September’s typically been the worst month of the year for both the Dow Jones industrial average and Standard & Poor’s 500-stock index—two indexes that include stocks from a lot of major companies and are often used to gauge how the overall market is doing. They have average losses during the month of .7 percent and .5 percent, respectively.
In midterm years like this one, the Dow performs a little worse, posting an average drop of 1 percent, while the S&P 500 falls .4 percent on average. The good news: Things often turn around. Since 1950, in midterm years, the Dow and S&P 500 have gained a respective averages of 3.1 and 3.3 percent in October. (That didn't happen this year: the indexes rose in September, then fell in early to mid-October before they began to recover at month's end.)
And if we take a slightly longer-term look at historical performance... Since 1962, the S&P 500 has fallen an average 19 percent in the year leading up to midterm elections. But in the year following the midterms, the index bounces back, rising more than 31 percent, on average.
Does it matter which party wins a majority?
Nope. The market is agnostic when it comes to party lines. The above results occurred regardless of whether Republicans or Democrats maintained or seized control over Congress.
The only thing investors stand firmly against is uncertainty. Not knowing who will be in power after the vote can make the market jittery, but once decisions are made, and there’s a clearer picture of what will come next, the market tends to calm down.
Can we expect the same this time?
Undecided. So far, the indexes have gone against tradition: The Dow hit new highs in early October but then had a bumpy ride the rest of the month. The S&P 500 index rose in September, but also fell in October before rebounding.
And plenty of issues could still rock the boat in the next month and beyond. On top of ongoing political drama, the trade war and rising interest rates (meaning higher interest on debt like credit card balances) loom large over the raging bull market. We’ve also seen the yield for 10-year Treasury bonds spike, sending stocks down. (When bond returns increase, some people funnel more money into this lower-risk investment—so money flows out of stocks and into bonds.)
Plus, the election results may change the overall market trajectory. If Democrats take control of both the House and Senate (an unlikely scenario by most expert accounts), today’s political disputes could be amplified with more government shutdowns, further investigations into President Donald Trump and a heightened threat of his impeachment. Stock prices may bump around in the face of such drama.
On the other hand, if the more likely scenario occurred—with the Dems taking control of just the House—the divided government would likely experience mostly gridlock. And the market could be happy for the standoff.
Still, the overall economy is doing well, with low unemployment and high business and consumer confidence. That indicates that this long-running bull may keep going no matter what happens in Congress, which would track with history’s post-midterms market performance.
How should I prepare my own portfolio?
Sit tight. Though political drama can push the market up and down in the short term, stocks have consistently risen up through it all over the long term. And as long as you focus on achieving your financial goals, sticking with your well-diversified portfolio should help you persist and stay strong through inevitable volatility.
This article was updated on November 2, 2018.
October 9, 2018