Midterm Elections & Market Impact: Investor Insights

Midterm elections are coming up in less than a week, and due to the major implications that the midterms can have on fiscal policy, many investors are asking: what effect will the elections have on the market?

With the return of market volatility in October, lingering trade war concerns, relations with China, and interest rate hikes from the Federal Reserve, Wall Street is keeping a close eye on Washington.

Lead-ups to elections cause uncertainty, something that tends to cause a spike in volatility, but we have also seen that markets tend to rally post-midterms.

What Are We Expecting From the Election?

As for the election itself, Democrats are hoping a “blue wave” will push them into control of Republican-led Congress, but it’s starting to look like it may be an uphill battle to do so. If Republicans stay in Congress, it may buoy President Donald Trump to more aggressively pursue items on his political agenda, which may include more tax reform. If the Democrats gain control of Congress, Trump’s policy goals will likely be suppressed.

In the Senate, there are 35 seats up for grabs, but only 9 are currently held by Republicans. In the House of Representatives, of course, each representative must be elected every two years. Democrats would need to gain 24 additional seats for a majority. This is a tall order, but a record 39 Republicans are not running for reelection.

Especially in the wake of the Kavanaugh controversy, the outcome is impossible to predict. Many analysts are preparing for a split Congress. However, we always have to be prepared for changes in sentiment – Trump was losing in the polls prior to his surprise presidential election victory in 2016. If we do end up with a divided Congress, it would likely mean more gridlock and less legislative action. This may prove a constructive environment for stocks, which tend to enjoy the relative certainty of less rule changes.

So how have midterms impacted the stock market in the past, and what do we recommend for investors during this politically uncertain time?

Market Volatility and the Midterm Elections

Recent market volatility has spooked many investors, but it is worth noting that choppiness just before midterm elections is common, and the calendar year following has historically been very strong, posting an average return of approximately 18% since the 1930s.

While we have no idea how the elections will shake out, we do know that markets don’t respond well to uncertainty, so the relative volatility in the buildup to the elections is not particularly unexpected. Post-election, even if the result is not what pundits and pollsters were anticipating, the market has historically responded with an upswing. For the markets, any resolution is better than uncertainty. This year has been a bit of an anomaly, with a rapid melt-up in January followed by a quick correction in February, but a familiar October, bearing resemblance to the last midterm-October market performance in 2014 where markets followed a V-shape, rallying higher into the end of the year.

But remember: history is only a guide, not a predictor of the future.

Our Take

Take any projections — whether about the outcome of the election or their impact on the markets — with a grain of salt. Nobody, including us, has a crystal ball — we don’t know for sure what will happen with the midterms and what impact they will have on the market. Don’t be surprised if you see the market rally in the coming weeks, but don’t get complacent either.

Regardless of what happens in the midterm elections, we recommend that instead of worrying about their impact on the market, investors should focus on developing and sticking to a long-term, well-diversified investing strategy. Remaining disciplined in a diversified strategy should help you better weather any market swings from political uncertainty, as well as other outside influences. Adhering to a long-term plan and rebalancing are some of the best ways to ensure you’re in a good spot, regardless of what the market does and when.

Instead of worrying about the elections this week, focus on what you can control to strengthen your financial plan. Invest in yourself this year – focus on important year-end financial planning like revisiting your regimented savings strategy and getting started on your end-of-year tax planning.

If you have any additional questions, contact a financial advisor.