While investors had to contend with many headwinds on the economic front this year, uncertainty around the November 8th midterm elections added to the sense of unease. Would there be a blue or red wave? And what would it mean for the stock market? These questions can provoke emotional reactions from some investors, which can, if left unchecked, contribute to poor portfolio decisions.
Making investment decisions based on one’s political beliefs or trying to time the market based on political outcomes is an ill-advised investment strategy. But now that the political uncertainty is off the table, we can start to anticipate where equity markets may go from here.
What we’ve seen from stocks in 2022 largely fits the historical pattern from past midterm years, with the S&P 500® Index underperforming in the months leading up to Election Day. But after the midterms, the historical record dating back to 1962 shows the S&P 500 returning 17% on average for the following 12-month period after the election. While this post-midterm trend has been favorable for investors, remember that past performance is not an indicator of future results.
The return of political gridlock in the post-midterm cycle won’t offset the macroeconomic headwinds investors will continue to face, from inflation to hawkish monetary policy to ongoing supply chain issues. At this point, investors should remember that corporate earnings and underlying economic conditions – not red or blue waves at the ballot box – are the fundamental drivers of equity market returns.