A Post-Midterm Market Forecast
Midterm elections took place this past November at a point in time when the United States economy is in a vulnerable state. As inflation has continued to rise throughout the year, there have been discussions of an impending recession. The newly elected officials can impact the economy and how it moves forward from its current state of high inflation. As a consumer, it’s important to understand how the market will look after the midterm elections.
According to an analysis done by U.S. Bank, historically pre-midterm election stock markets have had an annual return of 0.3% in the S&P 500 during the 12-month span leading up to the midterms while the 12-month period after the midterm elections shows an average return of 16.3% on the S&P 500. The cause of this outperformance after elections can be attributed to the uncertainty of economic policies before the election. However, the majority party in Congress is historically noted as not an indicator of market performance.
In the past several midterm elections, Congress has been fairly evenly split, often leading to gridlocked legislation changes. Limited policy change generally means less risk for investors and a more positive short-term economic impact.
It is important to note that this midterm election year has been unlike any other. The economy is still recovering from the effects of the Coronavirus pandemic. Partially due to the amount of spending and stimulus that was provided by the U.S. government during the pandemic, inflation is at a 40-year high. However, based on the historical data from U.S. Bank, the market after the midterm elections is consistent and predictable with solid returns. In a year where there has been a dramatic decrease in the returns for the S&P 500, a boost of positive market performance stemming from midterm elections would be welcomed.
One aspect to keep in mind in reference to midterm elections is the lack of control a set of politicians have over the stock market and economy overall. While policies can be made to affect the economy, there is no ultimate government control in a capitalistic economy.