Are Post-election Trends Supportive for Stocks?

Posted by George Smith, CFA, CAIA, CIPM, Portfolio Strategist

Wednesday, November 23, 2022

Now that the dust has largely settled on the 2022 midterm elections, with the Democrats retaining control of the Senate and the Republicans taking a narrow majority in the House, we take a look at some of the historic market trends relating to the election cycle.

We continue to view the midterm result of a mixed government as market-friendly overall. Markets don’t react well to uncertainty so political gridlock is normally a favorable outcome as new measures from the administration are thwarted by the opposing party. We explored some of the market data and how it relates to mixed government in our earlier blog, found here.

In addition to the political makeup of the government being supportive for stocks, as shown in the chart below, we are also approaching a stage in the presidential cycle that has also been historically supportive. Year three of the presidential cycle has returned almost 17% and been positive 89% of years since 1950, more than any other year of the cycle.

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Analyzing quarterly performance data tells a similar story with 4Q of year two of the presidential cycle the second strongest quarter, behind only the subsequent quarter, Q1 of year three. Q4 2022 has already seen a return of over 11% following the trend of historic strength during this period. Q1 of year three of the presidential cycle has seen a positive return in over 94% of all occurrences since 1950, the highest of any quarter. It also has the highest average return of all quarters. The average returns do noticeably drop later in year three, with Q3 average returns barely positive.

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Looking at the monthly market data for midterm years, November has been the second strongest month, and November 2022 has followed this trend. While a lot weaker than the returns seen historically in October and November, when political uncertainty is often resolved, December of a midterm year has still been fairly strong. December is the third strongest midterm year month but caution should be taken as only two-thirds of historic occurrences have been positive.

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