By Colleen Gillespie, CTFA, AIF®

Here we are entering the final stretch of 2018 and it’s hard to believe we’re also coming up on Sawston’s third anniversary! Time absolutely flies when you’re having fun.

As is no secret if you watch the evening news, we also have a mid-term election on November 6. While this may be a high stakes game for either of the two major political parties, it doesn’t necessarily mean there’s doom and gloom ahead in the markets. Let’s look at the possible impact of this year’s mid-term election and see what history says about this phenomenon.

As I’ve preached many times, the markets don’t like uncertainty. Volatility, (up and down days) has increased in recent days as there’s concern that inflation is picking up speed and will trigger more interest rate hikes. We may likely see increased volatility as we near Election Day, then taper off as the uncertainty of the outcome wanes.

Historically, we know that mid-term elections generally don’t fare well for the president’s political party. Current polls show that the Democrats are expected to win back the majority in the House of Representatives, and possibly the Senate, although that’s considered a long shot. If either scenario comes to fruition, what does that mean for your investments?

In the August 21 article in Forbes online entitled “Why Investors Shouldn’t Speculate on Mid-Term Elections,” the author, Martin Fridson states “if asked to guess how stocks behave following midterm elections, many investors would base their answers on a simple narrative, such as: “Republicans favor low taxes. Democrats want to regulate business more heavily. Logically, therefore, stocks perform better when Republicans prevail than when Democrats do.

The numbers tell a different story. Overall post-election timeframes—one day, three months and 12 months—the average S&P 500 rise was greater following Democratic gains than following Republican gains.  For the three-month and 12-month horizons, post-election declines occurred with the same frequency after Republican and Democratic pickups of seats. In the first session after Election Day, declines were more frequent following Republican gains.

These findings, however, are no cause for celebration by Democrats. None of the differences between the Republican and Democratic columns are statistically significant. (Quants can verify that conclusion using the standard deviations in the table below.)”[1]

 

The short answer is it may not have much of a difference on your portfolio at all over time, but there could be difficult days ahead. If Democrats win either the House or Senate, or both, there’s speculation the following scenarios are possible, according to Wayne Duggan a contributor to US News and World Report. In his article “7 Ways the Mid-Term Elections Could Impact Investors,” Mr. Duggan identifies several possible distractions that could challenge the markets. Namely, investor sentiment and stock prices could decline; the strength of the dollar may retract due to increased political risk in the US; corporate tax rates could be increased from 21% in the new tax reform act to 25% which isn’t positive for stocks; the recently announced US Mexico Canada Trade Agreement could have a more difficult time receiving Congressional approval without major concessions required; and the country could be consumed in political theatrics with possible Trump impeachment hearings. We are not saying that any of these will happen, but they are a few possibilities to watch. (Click on the HERE to see the article in its entirety)

So, while statistically there may not be much of a difference in the markets between having either party win the majority in Congress during mid-term elections, there could be certain political and economic stresses to watch that if they come to bear, could derail this 10-year stock rally. These pressures are more political in nature rather than anything we are seeing in any economic forecast. We will watch the upcoming third-quarter earnings reports for more guidance on economic trends. In the meantime, our best advice is that you keep your eye on your objectives, as will we. If you have any questions or concerns, please don’t hesitate to call us.

Sources:

  1. https://www.forbes.com/sites/investor/2018/08/21/why-investors-shouldnt-speculate-on-midterm-elections/#409d322075d
  2. https://money.usnews.com/investing/stock-market-news/slideshows/7-ways-the-midterm-elections-could-impact-investors