After billions of dollars being spent by candidates, organizations and their supporters, we will know the results of this year’s mid-term elections shortly. All of the hours of heated debates, TV ads, and media analysis have certainly been entertaining if you’re a political junky. But what does it all mean for your investments?
I’ve heard this question more than once. The other day a client asked me “What will the elections mean to me?” I told him that my crystal ball was cracked but it got me thinking.
After the most severe economic downturn in recent memory and two years of contentious political wrangling on Capitol Hill, it’s fair to say that this client and others like him are probably nervous about anything else that could result in another shoe (or worse) dropping on them and further disrupting their retirement plans.
However this mid-term election cycle ends it will likely be a mere blip in the markets when you look back a couple of years from now.
While you should be investing for the long-term, you certainly don’t want to see what you’ve earned simply do it’s best impersonation of Houdini either.
That being said, it’s reasonable to assume that even without all the acrimony of this election cycle that the party in power will lose seats. As noted in Investment News magazine (October 25, page 4), history shows “the party of the president has lost an average of 28 seats in the House of Representatives and four seats in the Senate during midterm elections.”
Election Year Bonus
What’s this mean for your personal bottom line? Stocks will likely increase. They usually do much better in the 90 trading days after an election regardless of whoever is gaining or lowing power. In research of the median gain of the Dow Jones Industrial Average dating back to 1922, the typical increase has been 8.5% over the quarter compared to 3.6% in the non-election years from November to mid-March.
While the actual results will be known shortly, it is very likely that Mrs. Pelosi will not be Speaker of the House come January. And I expect that the Senate will remain in Democratic control but with a slimmer majority.
Given all the change over the past couple of years and the historic legislation that still needs to be implemented for health care, financial regulation and economic stimulus, this may result in a much-needed “pause that refreshes.”
The market typically likes a balance of power and split control in the Congress will likely result in no new initiatives for businesses to deal with in the near term. Grid lock is good for business in some cases. Bad news for comprehensive immigration reform or environmental programs but one less uncertainty to factor into business plans.
On the other hand, grid lock has its downside, too. Right now, we’re about to enter a new year without any definitive fix to estate tax issues. Sorry, grandpa.
Look for the Rally to Follow
Based on history, the third year of a president’s term regardless of party is good for stocks. Since the end of World War II, the Dow has gained an average of 17%+ compared to just under 10% in the fourth year, 5.5% during the first and 3.7% during the second. (Investment News magazine, 10/11/10, page 72).
So the likely power change could likely propel stocks into a sustained rally in the near term. And with grid lock will also come some residual benefits for certain sectors like health care.
