We are in a mid-term election year for many seats in the US Senate and the House of Representatives. Elections are held in early Nov and the newly minted officials take office in January.
Markets are not a big fan of uncertainty. Whoever controls the US federal budget and policy direction plays a big part in how investors view where the economy is likely to head. Congress (encompasses the Senate and the House) passes future laws, nullifies current laws and defines federal spend & tax intake.
Many analysts and historians have studied how elections impact US stock market returns.
Irrespective of my political beliefs, as an investor, I go where the data takes me. The post-mid-term-election data is undeniable. See here: https://bit.ly/3Ct0vwh
Looking back at the past 60 years, over which timeframe 15 mid-term elections have been held, here what the data shows:
The SP 500 index has risen every single time 6 months and 12 months past a mid-term election. It does not matter who is in the White House or which party won or lost majority seats.
The market has risen an average of 15.1% over 6 months past the mid-term election and 16.3% over 12 months past the election.
Markets have outperformed by 2-3 times in these post-mid-term timeframes versus non-mid-term timeframes.
There are many theories about why markets outperform after a mid-term election. Most of them center around investor belief that for the two years leading into the subsequent presidential election, Congress will likely stay the course without any major policy changes. They will not upset the economic apple cart. Markets can freely function without political interference. I tend to agree with this point of view.
I even compared these market returns against timeframes when the US Fed was either raising or reducing interest rates. There is no apparent correlation between post-mid-term market returns and interest rate actions.
It is easy to forget that markets price in expected economic outcomes about 6-9 months in advance.
While politics plays a role in economic policy and governmental budgets, US markets always prefer being left alone to function without hindrance. Mid-term elections seem to give them that freedom and investors in turn get rewarded at least for about 12 months thereafter.