Mid-Term Elections: A Catalyst for Stocks?

Some timely analysis from Fidelity Investments Market Analysis, Research & Education group:

For whatever reason, U.S. midterm elections (1950-2009) typically have kicked off a period of strong gains for U.S. stock investors.

During the year after a November midterm election, average returns for large- and small-cap U.S. stocks have been significantly better than the long-term average annual returns for these categories since 1950.

Historically, there has been little differentiation among stock market performance whether a U.S. midterm election has resulted in political party gridlock or harmony, nor which party seized control:

• Large-cap stock returns have been about the same, whether or not the outcome resulted in gridlock or harmony. Small-cap stocks, meanwhile, outperformed in years of political harmony compared to gridlock.
• 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 returns haven’t varied much according to which party seized control.

The historical post-midterm-election stock results underscore two key points:

• Many factors influence near-term stock movements besides election results, such as the current trend of the economy and 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.

As a result, investors may consider sticking to their investment strategies instead of trying to move in and out of the market based on short-term political events.