Do midterm elections impact stocks?

U.S. midterm elections typically have kicked off a period of strong gains for U.S. stock investors. Consider the period from 1950 to 2009. During the year after a November midterm election, average annual returns for large-cap stocks were 23.4%, more than twice the 11% average from 1950 to 2009. Likewise, small-cap U.S. stocks returned 31.2% versus the long-term average annual returns of 13.5%.

Gridlock is good: perception or reality?

The theory that inaction caused by political gridlock—where the U.S. Senate, U.S. House of Representatives, and White House are not all controlled by the same party—is often considered “good for the market” does not appear to have much historical support from stock-return data following midterm elections. Large-cap stock returns during post-midterm election years have been about the same, whether or not the outcome resulted in gridlock or harmony (i.e. one party controls both houses of Congress and the White House). Small-cap stocks, meanwhile, outperformed in years of political harmony compared to gridlock.

The party effect—hard to find it

Conventional wisdom also generally supports the notion that Republicans are the more investment-friendly party, typically supporting less business regulation and lower taxes. However, average large-cap stock returns in post midterm-election years haven’t varied much according to which party seized control. Historically, the year after a U.S. midterm election has been a favorable one for stocks. Meanwhile, election outcomes have had no discernible impact on the stock market’s performance during these periods.

Investment implications

With a host of economic, budget, and tax issues facing the next Congress, government policy is arguably the center of attention now more than at any time in decades. Legislation over the next few years may have an impact on the future trajectory of the U.S. stock market. But history underscores two key points:

• Many things influence stock movements besides election results, particularly trends in the economy and corporate profit cycle.
• Even if legislative actions eventually lead to important policy changes, the midterm election outcomes themselves historically have not appeared to be major drivers of the stock market’s direction.

What does this mean to investors? Stick to a sound investing strategy, based on your time horizon and risk tolerance, instead of attempting to move in and out of the market based on short-term political events.

https://guidance.fidelity.com/viewpoints/midterm-elections