Midterm elections: Vote in the booth, not your portfolio
This is where advisors can help clients parse out what impact the election might have on their lives versus the impact it might have on their portfolio. As it turns out, the two aren’t usually as closely linked as many investors assume.
While political change may or may not be on the horizon, as investors we are better served by focusing on the bigger picture. Markets are more dependent on corporate earnings, the economic outlook and investor sentiment than on election outcomes. So, while clients and prospects might be looking to make investment decisions based on which party gets the most votes, considering a more holistic view might be a better approach.
To help support that, we have looked at how U.S. equities have reacted to the outcome of historical midterm elections since 1934. We found that the incumbent party tends to lose seats most of the time. To be exact, since 1934, U.S. House seats and Senate seats were lost 86% and 68% of the time, respectively.
Interestingly, markets tend to be unfazed by changes in the dominant political party. In the 12 months following midterm elections (Nov. 1 – Oct. 31), U.S. equities have never been negative. One could also say returns have been robust, averaging 23% in the 12-month period following the midterms and only trailing the long-term average of 11% for U.S. equities in four out of 22 occasions.
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Source: The American Presidency Project & Morningstar Direct. U.S. Equity: S&P 500 Index (1/1/1935-8/31/2022) and Ibbotson SBBI U.S. Large Stock Index in prior years. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. 12 Month Forward Return: November 1 to October 31 of the following year.
It seems that what markets don’t like is uncertainty. Once participants know what the rules are going to be and who will implement them, they look to maximize their returns with the government they have—not the one they wanted.
We believe investors are best served by staying focused on their long-term objectives and not allowing any distractions, in the way of short-term market noise, to sway them off course. As their advisor, you can help them stick to their plan by ensuring their asset allocation fits their needs and risk profile, while maintaining a diversified portfolio that fits their goals.
Oh, and remind them to vote—on their ballot, not in their nest egg.
Difficulty of market timing – What happens if you miss the top 10, 20 or 30 best days in the market—and how to stay in the game.
Resilience of stock market – Important historical perspective on what markets have done since the 1930s.
U.S. stock market growth and election cycles – A look at both sides of the political aisle—and how markets have responded.
Politics and markets – What happens when there is uncertainty in the markets, plus an important reminder on mixing your financial planning with politics.
Midterm election results – Reviewing what the markets have done after midterm elections, plus another reminder to not mix your financial planning with politics.