US Stock Market: How do stocks perform around midterm elections?

America will vote once more in November. On the ballot in these midterm elections are 35 Senate races that will determine who controls the upper chamber of the US Congress. According to administration insiders, the White House has tempered its early confidence regarding the midterm elections and is now concerned that Democrats may lose control of both chambers of Congress. The next two years of Joe Biden’s administration will be significantly impacted if one or both Houses of Congress are lost. Kevin Matras serves as Executive Vice President of Zacks.com says, “Of particular interest is the midterm portion of the cycle, which is where we are right now.”

And, how does the stock market react to mid-term election results? “S&P 500 Midterm Election Year Seasonal Pattern Since 1946” does not paint a rosy picture for 2022, said Jeff Hirsch, editor of the Stock Trader’s Almanac & Almanac Investor Newsletter.

Kevin Matras mentions in his newsletter that there’s a theory developed by Yale Hirsch of the Stock Trader’s Almanac, suggesting that the stock market follows a pattern that correlates with a U.S. president’s four-year term. The election cycle consists of the post-election, midterm, pre-election, and election years. 2022 is an example of a midterm year, i.e., the second year in the 4-year presidential cycle.

In the first two years after an election, the second year tends to be the weakest. In fact, it’s the weakest of all four years. Congressional elections take place – and with them, they bring the potential to shift the political backdrop.

Also Read: Fed rate hike in November may set the tone for the stock market

Hirsch discovered that wars, recessions, and bear markets tend to start in the first two years of a president’s term. In 2022, the market entered the weak spot of the cycle. And with an aggressive Fed, high inflation, and the ongoing Russia-Ukraine war, the weakness in stocks was amplified.

Those who know their market history will find it somewhat unsurprising that the start of this year was rough. The second and third quarters of midterm years are historically quite weak. (History repeating itself once again.)

But more prosperous times typically lie ahead in the latter half of the cycle.

Also Read: Recessionary risks in 2023: Two charts pointing towards recession

In fact, we’re entering the most bullish part of the calendar – Q4 of year 2 in the 4-year presidential cycle (the second-strongest quarter of all 16 quarters), sporting an average return of 6.6% (since 1950); and Q1 of year 3 (the strongest quarter of all 16 quarters), with a 7.4% average gain.

And when we factor in that the third year of the presidential cycle has historically witnessed the best performance of all four years, the outlook for stocks looks even brighter.

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