How the S&P performs leading up to midterm elections
Midterm elections are approximately six months away. For those unfamiliar, midterms are in even-numbered years where there is not a presidential election. All 435 members of the House of Representatives are up for election, and about a third of the 100 Senate seats. This year, Democrats are expected to pick up a lot of seats in Congress, but that's not my focus here. I’m curious about how stocks tend to behave from now until Election Day, which is always the Tuesday after the first Monday in November.
We know from this article that May through October -- a time frame that closely resembles what I’m looking at -- has been a tough time for stocks. Here, I'm trying to determine if that's the case during midterm election years as well.
Six Months Until Election Day
Looking back over the past 50 years, I found the returns of the S&P 500 Index (SPX) in the six months leading up to Election Day. Unfortunately, the historically poor returns over the next six months is due mainly to the index’s performance in midterm election years.
In these years, the S&P 500 averages a gain barely above breakeven, with 58% of the returns positive. Stocks perform best during this period when there is an upcoming presidential election. In those years, the index gains a respectable 3.73%, on average, with positive returns an impressive 92% of the time. The volatility of the returns has been predictable. The most volatile returns have been during presidential election years, and the least volatile returns have occurred in odd years in which there were no elections.
If History Is Any Guide, Now Is the Time to Sell
The chart below shows the typical path the S&P 500 has taken in each of the three scenarios. If this is a guide for the next six months, then now would be the time to sell. Stocks have averaged a 4% loss in the next five months, before a strong final month leading into the midterm elections.
Stocks Tend to Rally Back in October
This table helps quantify what we see in the chart above and further supports the "sell now" argument (at least based on this study). Over the past 12 midterm elections, the next two months have been a terrible time to hold stocks. The S&P 500 averages a 2.77% loss, with only 42% of the returns positive. After these two months, however, stocks become more attractive. The middle two months (approximately July and August) have typically been flat during midterm election years, before heading into a downright bullish two-month period leading into the elections.
