Mid-Term Matters

There have been many different catalysts for price movement over the past year. We began the year with continued concerns around new virus variants while still recovering from the pandemic that began in 2020. Focus quickly shifted to western Europe in the first quarter as all eyes were following the war between Russia and Ukraine, which continues to this day. Meanwhile, the US and most other nations around the globe are currently struggling to tame inflation. With all the other catalysts for major market movement over the past several months, it may be easy to forget that we are in the midst of a mid-term election year.

Leaving politics aside, we find that certain themes occur during past presidencies. Organizing the S&P 500 Index (SPX) quarterly returns since 1927 by the year of each presidential term shows that the second year of a presidential term typically carries the worst returns. In these mid-term years, on average the SPX attains only a modest gain of 3.36%. Furthermore, the second quarter of year two shows the worst average return of any single quarter at -1.60%. While we still have a few weeks left in the third quarter of 2022, the action through Friday, September 16, shows a similar picture. The year-to-date decline of -18.73% so far this year is far worse than the 27% gain seen in the first year of the current presidential term. The Q2 return this year of -16.45% is also the lowest returning quarter thus far in Biden’s presidency.

As we are often reminded, past performance is not indicative of future results. However, the historical tendencies of past presidencies do point toward the potential for stronger returns following the mid-term election cycle. The third year of a presidential term shows an average gain of 13.51%, with year three showing a positive return in 18 of the 24 instances examined. In fact, Q4 of year two and Q1 of year three show the best back-to-back averages of any two quarters, with each averaging a gain of more than 5%. Stock market analysts call this the market cycle’s sweet spot.

, Mid-Term Matters

Democrats Don’t Matter More

Focusing on just the democratic presidencies (like the current one) shows a very similar picture, even though we only view 50 of the 95 years since 1927. This data shows the first year of a presidential term demonstrating strong returns, which are again followed by the lowest average annual returns of any term year at a gain of 3.76%. The democratic presidencies show the weakest quarters occurring in Q1 and Q2 of year two, which would match the movement thus far through the current presidential term. The third year still shows the strongest average returns at 14.68%.

, Mid-Term Matters

No one knows with certainty whether the months to come will follow suit with the historical tendencies following mid-term elections. However, one interpretation of the data could circle back to the concept of financial market participants feeling more comfortable with defined expectations. This would maintain that markets rise in the first year of a presidential term as the uncertainty from the presidential election is alleviated. The second year comes with an enhanced potential for market weakness amid new uncertainty from upcoming mid-term elections. The third year would then show the strongest returns as the mid-term elections both remove the congressional uncertainty and indicate which direction the country may lean in the next presidential cycle.

However, thats all just conjecture. What really matters is the historical patterns show first half weakness is expected in mid-term election years. An upside exists after the US mid-term congressional elections in early November.