This week, citizens of the United States will decide which political party controls the legislative branch, as well as several gubernatorial seats. Midterm elections will be held for 435 seats in the House of Representatives, 35 seats in the Senate, and 35 gubernatorial seats. These elections leave many wondering what impacts these elections will have on the equity markets as a whole.

Generally speaking, voters have not favored the political party currently in power. Since 1922, the party of the sitting president has lost, on average, 30 seats in the House of Representatives and four seats in the Senate. In more recent memory– Trump lost 40 seats, Obama lost 63 seats, Bush lost 32 seats, and Clinton lost 54 seats in each president’s respective midterm election cycle.

However, historically speaking, midterm elections have been a positive indicator for equity performance. In 17 of the last 19 midterm election cycles, market performance has increased six months after the election compared to the months prior. On average since 1950, the six months following a midterm election have resulted in a 16% market return. Extrapolating further to twelve months following resulted in an 18% return, and twenty four months following resulted in a 33% return. This data is regardless of which political party won and what issues were taking place at the time.

While there is no concrete or definitive answer for why this trend exists, generally speaking, presidents and parties in power attempt to surge the economy post-midterms through expansionary policies. This, more often than not, stimulates economic activity and leads to overall positive market returns.

The question remains– will this year follow the trend or be an exception? One of the cautions surrounding market recovery moving forward in the short term is that of inflation. As inflation hits decade-long highs, we could see the Federal Reserve further tightening monetary policy in an attempt to curb rising prices. With the potential of continued rising interest rates, it’s difficult to compare the market recoveries of previous midterm cycles with 2022’s current reality.

What we can say with reasonable certainty is that the data shows the market recoveries that have occurred in the past have no bearing on what political party is currently in power. Both 2016 and 2020 were election years in the United States that saw Donald Trump and Joe Biden, respectively, elected President. In both years, the S&P 500 saw double digit total returns. Furthermore, annual stock market returns from Donald Trump’s four years in office and Barack Obama’s last four years in office were nearly identical, at 16% and 16.3%, respectively. Making sweeping changes to your financial plan in preparation for a certain political outcome is generally ill-advised, as large scale changes should only be addressed when your financial goals themselves change.

Over the long-term, markets are driven by much more than just politics. Your financial plan and investment strategy should extend far beyond any specific president, political party, or election cycle.

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Equilibrium Wealth Advisors is a registered investment advisor. The contents of this article are for educational purposes only and do not represent investment advice.

Stock markets are volatile, and the prices of equity securities fluctuate based on changes in a company’s financial condition and overall market and economic conditions. Although common stocks have historically generated higher average total returns than fixed-income securities over the long-term, common stocks also have experienced significantly more volatility in those returns and, in certain periods, have significantly underperformed relative to fixed-income securities. An adverse event, such as an unfavorable earnings report, may depress the value of a particular common stock held by the Fund. A common stock may also decline due to factors which affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry.  For dividend-paying stocks, dividends are not guaranteed and may decrease without notice.

Past performance is no guarantee of future results.  The change in investment value reflects the appreciation or depreciation due to price changes, plus any distributions and income earned during the report period, less any transaction costs, sales charges, or fees. Gain/loss and holding period information may not reflect adjustments required for tax reporting purposes. You should verify such information when calculating reportable gain or loss.

This content has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment advice or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document.  The tax and estate planning information provided is general in nature.  It is provided for informational purposes only and should not be construed as legal or tax advice.  Always consult an attorney or tax professional regarding your specific legal or tax situation.