Why investors love midterm elections

Republican dominance in yesterday's midterm elections have pushed the US dollar to a seven-year high agains the yen and given an early boost to stocks Wednesday morning. There's a reason why investors salivate when midterm elections cycle through.

J. Scott Applewhite/AP
Senate Minority Leader Mitch McConnell of Ky., joined by his wife, former Labor Secretary Elaine Chao, celebrates with his supporters at an election night party in Louisville, Ky.,Tuesday, Nov. 4, 2014. Republican gains in yesterday's midterms have US investors feeling chipper.

For all the deep and thoughtful analysis of how a changing congressional landscape will affect the economy and markets, some investors are turning to a very simple strategy to profit from the midterm elections: Buy an index fund!

There's a reason why investors salivate when midterm elections cycle through. It's been a very bullish catalyst for the markets, and has been for decades. According to Chief Equity Strategist Sam Stovall of S&P Capital IQ, the seasonality associated with midterms has brought positive returns for the stock market a lot more than it has brought losses. Stovall notes that since 1946, there have been 17 midterm election years. On average, the S&P 500's return between Oct. 31 of the midterm year and Oct. 31 of the following year has been an eye-popping 17.5 percent. What's even more staggering is how many times the index has produced a positive return … 17.

In other words, if investors had bought the S&P 500 just before each midterm election and held it for a year, they'd have made money 100 percent of the time. The best-performing span occurred after the 1954 midterms, with the S&P 500 rising 33.6 percent in the year following. 

The worst performing one-year span occurred just after the 1986 midterms, with the index rising 3.2 percent. It's worth noting that the October-to-October period following the 1986 midterms also included the Black Monday stock market crash on Oct. 19, 1987, when the S&P 500 dropped 20 percent in one day. Even with that, the index managed to book a positive return for the year ended Oct. 31, 1987.

If the thought of sticking with a trade for a full year isn't nearly as appealing as it has been in the past, consider what happens with stocks in the six-month window following midterms. Between the months of November of a midterm election year and April of the following year, the S&P 500 has gained an average of 15.3 percent and has been positive 94 percent of the time, Stovall says.

Of course, past performance is never a guarantee of how things will fare in the future. There is a plethora of reasons why investors should be worried. After all, there's slowing growth in Europe and China, falling oil prices around the world, fear of deflation, geopolitical risks in the Middle East, an uneven housing recovery in the United States, etc. U.S. stock markets are sitting near record highs and haven't experienced a significant pullback since 2011. That's just a short list of reasons why investors are worried.

The bulls will point to midterm seasonality as a reason for why the party will continue into 2015. The bears say all good things, like winning streaks, must come to an end. This could be the year when it all goes wrong, but until then, optimists will point to around 70 years of market history as being on their side.

You've read  of  free articles. Subscribe to continue.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to Why investors love midterm elections
Read this article in
https://www.csmonitor.com/Business/Latest-News-Wires/2014/1105/Why-investors-love-midterm-elections
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe