The Midterms Are Over, Let the Stock Rally Begin!

While several midterm races were still too close to call on Wednesday morning, many stock market investors will just be glad it’s over so they can move on to greener pastures. After all, the stock market has a history of underperforming in years leading up to midterm elections while doing significantly better after the ballots have been cast.

Looking back as far as 1962, the average annual return of the S&P 500 in the 12 months before a midterm election has been -0.7 percent, compared to an average of 8.1 percent for all years from 1962 to 2022. Conversely, the index has historically outperformed its long-term average in the 12 months after a midterm election, with an average return of 16.3 percent.

While there are obviously many factors at play, one theory is that the high degree of uncertainty – investors’ kryptonite – in the runup to elections is negatively influencing market performance, while the lack thereof is fueling stock market rallies after. Interestingly, an analysis from U.S. Bank has found that the outcome of the midterms has no significant impact on post-election stock market performance, despite conventional wisdom saying that Republican wins should favor businesses and thus the stock market.

Unsurprisingly, the biggest market influencer in midterm election years was found to be the health of the overall economy, which is why investors probably shouldn’t expect a big post-election bump in the coming months. With inflation still high, interest rates rising and global crises abound, the risk of a recession in 2023 is very real and will likely dampen any post-election bump in stock prices.