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  • Writer's pictureRobert Baharian

A Monster Tailwind for Markets

Updated: Oct 28, 2022

There are so many reasons to be gloomy in markets right now. I won't go through them. They're all wrapped up in September's -9.2% for the S&P 500 - the worst September since 2002, when the index fell by -11%.

Before you hit the 'Sell Everything' button, here is at leat one bullish catalyst on the horizon for markets - the US midterm elections, as voters are heading to the ballot box on November the 8th. And it's clear in the data - midterm elections are historically bullish for the stock market.

Analysis of returns for the S&P 500 Index since 1931 revealed that the path of stocks throughout midterm election years differs noticeably compared to all other years. In fact, market returns tend to be muted until later in the midterm years.

Since markets typically rise over long periods of time, the average stock movement during an average year should steadily increase. But the data show us that in the first several months of years with a midterm election, stocks have tended to have lower average returns and often gained little ground until shortly before the election.

Source: Capital Group, RIMES, Standard & Poor’s. The chart shows the average trajectory of equity returns throughout midterm election years compared to non-midterm election years. Each point on the lines represents the average year-to-date return as of that particular month and day and is calculated using daily price returns from 1/1/31–12/31/21.

Furthermore, we find that markets are far more volatile in midterm election years, especially in the weeks leading up to Election Day.

Source: Capital Group, RIMES, Standard & Poor’s. As of 12/31/21. Volatility is calculated using the standard deviation of daily returns for each individual month. Standard deviation is a measure of how returns over time have varied from the average. A lower number signifies lower volatility. The chart shows median volatility for the S&P 500 Index for each month since 1970, displayed on an annualized basis.

Since 1950, there have been 18 midterm election cycles, and in the twelve months following each of those cycles, the stock market has had positive returns. In fact, significantly outperforming pre-midterm periods as can be seen in the below two charts.

Source: State Street Global Advisors

The bottom line is that the S&P 500 index has not posted negative returns 12 months following a midterm election since 1950. The average annual return has been around 16% 12 months forward, and 33.7% 24 months forward.

We've seen many bear market rallies of late, and I don't know which one it will be, but one of them will stick. And we will see markets rally again - mark my words. If you listen to the doomsayers, this market will never recover. I trust data. And the data tell me the doomsayers are wrong. In fact there are hundreds of years of data to prove how wrong they have been. The same data tell me that patience and discipline are the two key ingredients that will outperform the average investor. Bear markerts don't last forever.


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