Voters vote, and markets react

Were the mid-term election results good for the market?

Warren Buffett once said, “if you mix politics and investing you’re making a big mistake.” But with last week’s midterm elections and the subsequent market reaction, I can’t help by comment a little.

Anyone who knows me knows I am a political junkie. It is a passion of mine, I simply love the theater of it all. However, I am very intentional about not bringing up politics in my columns. The most obvious reason being that its bad business. No matter what I say, I’m going to anger half of the population so I’m better off keeping my opinions to myself.

Before you stop reading, allow me to assure you my personal ideology will not be the topic of this article. Instead, I will try to focus only on the facts, and how market reactions to past elections could impact you as an investor today.

With those disclaimers out of the way, let’s look at the effect this last Tuesday’s election might have on the market. One of the things I found most interesting about how the market reacts to elections is it seems to be pretty apolitical.

In fact, in the past 72 years – that’s 18 election cycles – the market has gone up every single year following the midterm election. Regardless of what party gained or kept power, or who controlled the White House. In fact, in those 72 years, stocks have averaged a 17 percent gain in the year after a mid-term.

Here’s another interesting correlation between elections and the market. On average, since 1928, year two of a president’s four-year term (which is what we are in now) has the lowest growth in the market with an average rate of only 4 percent. In comparison, year three has averaged more than double any other year of the four-year cycle with an average of just under 14 percent.

So, being a student of history and someone who doesn’t believe in coincidences, the obvious question I asked myself is, why has the market been so good during these years? And will that trend continue in 2019? Because my market analysis expertise is nowhere near the level of fellow advisor Aaron Pickert, I asked for his help in interpreting these statistics.

He said something that really caught my attention. “Markets hate surprises, he said. “In general, markets do better when there is certainty of what is going to happen next. Unless of course what they’re certain will happen will be bad” For me, this was extremely insightful. What this told me was markets weren’t particularly interested in who won the elections last week as long as it was within the scope of what was expected.

After last Tuesday’s elections, most political science experts are predicting gridlock due to no single party holding power in both legislative and executive branches. Out of curiosity, I wondered how many times since WWII this has been the result after a midterm election. It turns out midterm elections have resulted in split power all but three times. Those years were 1962, 1966 and 2002. In those three years where the result of a midterm was one party holding all the power, the average loss of the market during that same year was 15.5 percent.

As you know, past performance is never a guarantee of future results. But, the day after the election the market was up more than 2 percent, which is certainly a good sign. Since then, the market has remained volatile. As we finish up the year and look forward to the next, we at Stewardship Capital are optimistic that this bull market will continue its run. However, as always, we will be watching for key indicators that the economy is slowing and will take action for our clients if we become concerned. But for now, we are still bullish and hope history continues to repeat itself over the coming 12 months.

(Past performance is no guarantee of future results. Advice is intended to be general in nature.)

November 14th, 2018|Categories: Personal Finances|