Midterm election year pattern
01/02/18

Midterm elections are back on tap in November 2018, which means you might be hearing about how bullish the stock market typically is during these years. It’s about as misleading a market anecdote as you can find.

So when it comes to trading, forget (if you can) all the partisan politics surrounding the November elections and whether Democrats can wrest control from Republicans, blah, blah, blah, and keep this in mind :

●Contrary to popular perception, US stocks haven’t done that well during midterm election years over the course of the entire year. Basically, the market has tended to underperform before the election and outperform after it. That’s a pretty important distinction.

Let’s consider the market’s performance in midterm election (MTE) years to its performance in all other years during two periods:

1.       January-October (i.e., through the last day of October immediately preceding the November elections in MTE years);

2.       October-October (the last day of October immediately preceding the November elections to the following year’s final October trading day).

Now let’s break down the numbers. The first table below compares the Dow Jones Industrial Average (INDU) and S&P 500 (SPX) returns for the two periods, in MTE years vs. all other years. (The Dow period contained 22 MTE years, while the S&P 500 period contained 14 MTE years.) Both indexes’ January-October performance was downright bad in MTE years, but that was more than compensated for by the great returns in the October-October periods after mid-term elections—the S&P’s average return was nearly twice that after midterm elections as it was in all other years (16.57% vs. 8.27%).

Midterm elections, Dow and S&P 500 average returns

Source: OptionsHouse

This table shows how often the two periods posted gains or losses in MTE years vs. all other years:

 

Midterm elections: Percentage of times indexes closed higher

Source: OptionsHouse

The differences are, again, fairly dramatic. And they don’t have anything to do with how the politics shake out—just that they shake out one way or the other. Markets have enough uncertainty without political turmoil tossed in. After the elections, the political course will be clearer, one way or the other. Just something else to factor into your trading as the year progresses.

 

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1 Supporting document available upon request