2022 is a midterm election year. Citizens across the country will be electing representatives that could either further cement the status quo or possibly shift control to a new political party. While midterm elections don’t get quite as much press as presidential elections, many people still find themselves wrapped up in the events… and wrapped up in worry.
Really, before you read much further, you might want to check out my article Election Season: Should I Worry About My Stocks? That article focuses specifically on presidential elections, whereas today’s article is specific to the midterm election years. However, my underlying opinion about both remains the same – which is why I want you to read it.
It boils down to this:
1. Stock investors are investing in business.
2. The U.S. has had very favorable as well as very unfavorable business environments related to politics.
3. U.S. companies keep making money and enriching their shareholders regardless of party control.
Ok, now I am focusing on what has happened historically in midterm election years:
1. Positive returns… with a little caveat
Since 1946, the S&P 500 has had an average 10.26% return on all non-midterm election years (as seen in grey). However, the S&P 500 has only averaged 8.95% overall (blue). Why is that? …. Because these midterm election years actually drag it down. They only average 5.03%.
So, there lies the caveat. It’s still a positive return on average… just notably less than other years. You will note that the most volatility in the red line occurs in the middle of the year (months May through November) where the results are still unknown. The stock market tends not to like the unknowns.
2. Buying opportunities… if you have the capacity to “buy the dips”
We tend to look at performance at the end of each year. As you can see on the chart below, since 1980, the S&P 500 has been positive every 32 out of 42 times. There are a lot more grey bars going up than there are going down. That said, even in the years where the grey bars show positive return, there WAS volatility during that year that wasn’t so rosy. The red dots show the lowest portfolio drop during each year.
The average portfolio dip during a year is actually negative 14%. However, this is throughout all market years. Midterm years are different. Their average intra decline is actually -16.6%! Definitely more volatility during midterm years. Volatility is only a negative if you are unprepared to handle it (both in regard to your mentality and your portfolio allocation).
So, this can be a very real negative if you aren’t prepared, but volatility is a positive if you have cash to buy great companies selling at a discount.
Overall, I want to give you quick insight on historical market occurrences – the future is not guaranteed! It all comes down to setting a solid investment plan and STICKING TO IT! That way, if volatile times come during this midterm election year (or other years), you and your portfolio are equipped to stay the course and pursue long term growth.