Historically, No Matter Who Wins Midterm Elections Stocks Have Always Gone Up, By A LOT
Many investors believe that it was uncertainty about the coming midterms that at least partially caused stocks to crash in October. However, while that might have been a small part of the reason for the most recent pullback (S&P 500 didn’t even enter a correction), anyone selling before election day is likely making a big mistake.
That’s because since 1950 the stock market has usually been negative in October, only to rally about 9% through the end of the year, usually around the time the election ends. But those are just averages, surely some midterm elections see stocks plunge right? Actually no. Since 1946 there have been 18 midterm elections, and 100% of the time over this 72 year period, no matter the outcome, stocks were up 12 months later. Even more impressive? On average stocks gained 17% in the year following a midterm. That’s because the post-midterm rally doesn’t just apply to the year of the election itself. Usually, the year following is the strongest one for the market, in terms of the four-year cycle.
This means that, if market history repeats itself, then 2019 might see stocks rally about 14%. And keep in mind that the above chart goes all the way back to 1928, and thus includes the Great Depression when stocks fell 90% at one point. That skews the average much lower.
Since 1946 the average market gain, from that year’s lows (usually before the election) to the end of the following year (2019 in our case) was 32%. This means that if you fear a negative outcome on election day enough to be out of stocks you risk missing out on VERY substantial gains.
But that’s the average gain, which might be inflated by especially bullish years right? Indeed that’s true. But according to Ned Davis Research since 1946 not just has every single midterm been followed by a rally, but the median gains for stocks (half above and half below this amount) has been 18.4% in the 9 month period from September 30th to June 30th.
Why is that?