Congressional elections, like the 2022 midterms, tend to impact the stock market in predictable ways. Stock prices typically decline, and volatility increases in the weeks leading up to the election, and the opposite is true in the months following the vote. The market likes certainty, so it gets jittery when the outcome of the election is unknown, and gets a bounce once the final results are in. If we have a divided Congress, like we do now, investors anticipate gridlock. And since a stalemate on Capitol Hill usually means there’ll be no big in taxes or regulations, the market often rebounds nicely from pre-election lows.
We’re seeing this scenario play out in 2022, but only to a limited degree. While the market has settled down and moved up since the closest races have been called, these changes have been less dramatic than we expected. The reason appears to the unpredictable economic and political environment. Currently, inflation, interest rate changes, a looming recession, and the war in Ukraine are all catalysts for uncertainty.
Historically, the S&P 500 has averaged 16.3% in the 12 months after a midterm election. If that occurs in 2023, we’ll be close to recovering the 15% drop in the index from January through November 2022. I’m cautiously bullish, but don’t expect we’ll hit the 16.3% average. We’ll still be grappling with uncertainty even though the Fed recently said it plans to wind down interest rate hikes and gridlock should produce no changes in corporate taxes or business regulations. The wild cards are likely to be the depth of a U.S. and global recession, increasing inflation, and heightened geopolitical tension involving Russia and China.
I believe the U.S. will be the safest place for long-term investors, and I’ve been urging clients to focus on buying or holding stock in large, well established companies that have a solid dividend record. The price of these blue chip stock may not climb the fastest, but I believe these securities can deliver consistent, reliable performance with a reasonable level of risk. That’s not to say money can’t be made in technology stocks. Owning tech stocks can be very profitable, but as I tell mature clients, tech may not be the best place to invest if you’re approaching retirement or already retired.
Obviously, none of us can predict the future. And while understanding the potential correlation between investment performance and election results may satisfy your intellectual curiosity, it’s not wise for it to dictate your investment decisions. Elections may impact the market, for days, weeks, or months at the most. They rarely, if ever, impact long-term investment performance. So if you’re in it for the long haul, file this article under “nice to know” rather than “take action now.”
Forbes.com –“3 ways the Midterm Elections Could Impact the Stock Market” 11/7/22
Foreign Affairs.com –“Not Just Another Recession” 11/22/22
finance.yahoo.com – “Citi Warns Rolling Recessions Will Shake Global Economy in 2023” 11/30/22
wsj.com – “Dow Shines as Higher Rates Squeeze Nasdaq Tech Stocks” 12/4/22
washingtonpost.com – “Here’s How Midterm Elections Impact your Stock Portfolio” 11/13/2022
cnbc.com –“Elon Musk Says Fed Must Cut Rates Immediately to Stop a Severe Recession” 11/30/22
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