Midterm Elections 2022: Stock Market Returns Following Midterms

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A lot of investors are curious if the midterms will affect the stock market in any meaningful way, following the midterm elections in 2022.

The short and simple answer is no.

The stock market does not like uncertainty, and it doesn’t matter how that uncertainty is resolved as long as it gets resolved. It is the unknown that is the biggest problem for the stock market.

If we have a definitive election outcome, historically the stock market will rally. As you can see in this chart from Stock Trader’s Almanac, it doesn’t matter what the overall outcome of the midterm election is. It is the mere fact that the midterms are over that gets the market excited.

Historical Stock Market Results After Midterm Elections

Since 1962, there have been 15 elections not counting 2022. In the twelve months following each of those midterms, the stock market has had positive returns.

Those annualized gains compound to about a 16.3% average return per year.

The last time there was a negative year following a midterm election was in 1939. The worst twelve-month return post-1950 was in 1986 when the S&P 500 finished the year higher by 4%.

Not too bad. How does every other year stack on a rolling twelve-month return basis? 6.4%.

If there is ever a time to be bullish toward equities, it is following a midterm election cycle.

Year of midterm	President	Party	President’s party: House seats	President’s party: Senate seats	Before-midterm S&P 500 price performance Nov. 1-Oct. 31 (12 months)**	S&P 500 price performance Nov. 1-Jan. 31 (3 months)	S&P 500 price performance Nov. 1-Apr. 30 (6 months)	S&P 500 price performance Nov 1.-Oct. 31 (12 months)
1962	John F. Kennedy	D	-4	+3	-17.6%	17.1%	23.5%	30.9%
1966	Lyndon Johnson	D	-47	-4	-13.2%	8.0%	17.2%	17.1%
1970	Richard Nixon	R	-12	+2	-14.4%	15.1%	24.8%	13.0%
1974	Gerald Ford (Nixon)	R	-48	-5	-31.8%	4.2%	18.1%	20.5%
1978	Jimmy Carter	D	-15	-3	0.9%	7.3%	9.2%	9.3%
1982	Ronald Reagan	R	-26	+1	9.7%	8.7%	23.0%	22.3%
1986	Ronald Reagan	R	-5	-8	28.5%	12.3%	18.2%	3.2%
1990	George Bush	R	-8	-1	-10.7%	13.1%	23.5%	29.1%
1994	Bill Clinton	D	-52	-8	1.0%	-0.4%	9.0%	23.1%
1998	Bill Clinton	D	5	0	20.1%	16.5%	21.5%	24.1%
2002	George W. Bush	R	8	+2	-16.4%	-3.4%	3.5%	18.6%
2006	George W. Bush	R	-30	-6	14.2%	4.4%	7.6%	12.4%
2010	Barack Obama	D	-63	-6	14.2%	8.7%	15.2%	5.9%
2014	Barack Obama	D	-13	-9	14.9%	-1.1%	3.3%	3.0%
2018	Donald Trump	R	-40	+2	5.3%	-0.3%	8.6%	12.0%
2022	Joe Biden	D	?	?	-20.6%
		Average seat change:	-23	-3
				Midterm average:	-1.0%	7.3%	15.1%	16.3%
				Non-midterm average*:	11.2%	2.9%	4.2%	6.4%

Best and Worst Scenarios for Positive Returns After Elections

The next question I usually get is what are the best situations for positive returns in the stock market following an election? 

The best case via control of the Senate, House, and President is a Democratic president and a split Congress. Those returns, since 1936, average out to be 16% per year until the next election. This has happened five times, during this period, including the most recent election.

The next best situation? Democratic President and Republican Congress (10 times) returning 15% per year on average until the next election cycle.

The excellent news is that considering all possible outcomes from 1936-2018 we have the best setup for a rally into the next US Presidential election.

What is the worst situational outcome? A Republican President and a Republican Congress (12 times). Those annualized returns are 2% per year into the next election cycle.

President	Republican	Republican	Republican	Democratic	Democratic	Democratic
Congress	Republican	Democratic	Split	Democratic	Republican	Split
Number of Years Occurred	12	22	7	34	10	4
Average Annual S&P 500 Return	2.1%	8.6%	12.0%	14.1%	15.0%	16.0%

What about the Midterm Election in 2022?

Does this mean that the stock market is going to produce the same returns this time around? Not so fast.

We have a unique market dynamic right now that we have not seen since 2008. That unique dynamic is Quantitative Tightening and the balance sheet runoff by the Federal Reserve.

The Federal Reserve is currently fighting inflation. Their target rate for inflation is 2%. Inflation is now at 7.7% for the twelve months that ended in October. The Fed is still tightening rates with an expected 50 basis point move forecasted for December.

While inflation is slowing, the Fed still has the mandate to bring inflation down to around 2%. Until we get CPI reports in the 2% to 3% range, it would be premature to think the market is going to rally without any headwinds or overhead resistance.

The great news is that the stock market always bottoms during bear markets or recessions. It is always the darkest before the dawn and new leading growth stocks will buck the trend of the selling in the overall market, and there will be a new crop of exciting dynamic growth stocks that will lead the market higher following the completion of this downtrend cycle. I myself have been using Pickilo to track and analyze my investments to protect myself from this downtrend.

Closing Thoughts

Are we in the clear yet? No one knows. However, I look for the market to bottom once the reason for entering a bear market has abated.

The Fed hiking rates to fight inflation is what got us into this mess. Until the Fed pivots via rate cuts (Quantitative Easing) or starts buying assets on its balance sheet calling a bottom is 100% premature.

I’m always ready for the next bull market and you can be sure when that official bottom happens I will be there to participate in the next new batch of exciting leading stocks that will lead the market higher once the current downtrend is over. I hope you will too.

The views expressed herein do not constitute research, investment advice, or trade recommendations.