James Pethokoukis

Politics and policy from inside Washington

How will the midterms affect the stock market?

September 20, 2010

The always insightful and interesting Ed Yardeni gathers some numbers on elections and market returns:

So what do stocks do just before and just after midterm elections and in the third year of the Presidential Cycle? They usually go up, and by quite a lot. Let’s review:

(1) According to my friend Laszlo Birinyi and former colleague at Deutsche Bank, in the 12 midterm election years going back to 1962, the S&P 500 has on average risen 2.4% in the two months prior to the election and gained 7.5% in the three months following. The only post-election downer was during 2002, when the Republicans under George W. Bush retook the Senate and held on to their slight majority in the House. The biggest gain was 14.6% during 1998 (under Clinton) and the smallest gain was 3.3% during 1994 when the Democrats under Bill Clinton lost both the House and Senate.

(2) According to Deutsche Bank chief U.S. equities strategist Binky Chadha, the S&P 500 has produced gains in 18 out of the last 19 midterm election cycles. The S&P has returned an average of 13% in the six months after midterm elections, and 17% over the next 12 months. The indicator works regardless of which party wins control of Congress, but it’s especially strong when there is a Democratic president and Republican legislature. When that scenario is in place, stocks average 14.6% annual returns, according to Bill Stone, chief investment strategist at PNC Wealth Management. “It’s the best of all iterations,” he says.

(3) The DJIA has risen 24 times and fallen 5 times in the 29 third calendar years of the Presidential Cycle since 1891. The overall, average gain for the 29 third calendar years is 12.31%, with the 16 Republican presidencies averaging gains of 5.12% and the 13 Democratic presidencies averaging gains of 21.14%.

(4) Joe analyzed the four-year Presidential Cycle of the S&P 500 since 1952. He found that this index increased on average by 4.4% during the first year, 4.8% during the second, 18.4% during the third, and 5.7% during the fourth. Excluding second terms of reelected Presidents, he found that the first term of all of them since 1952 averaged 3.2% during the first year, 2.2% during the second year, 21.6% during the third year, and 11.5% during the fourth year. In other words, third years tend to be the best ones, and have been up years during every Presidential Cycle since 1955.

While the historical record suggests that the stock market is likely to do very well over the rest of this year, and even better next year, might it be different this time? I’ll discuss this possibility tomorrow.

Me: This also plays into the “gridlock into good” mantra. And certainly there should be less anti-market legislation in the second half of Obama’s term than the first half. But the U.S. does have real problems that need attending to — budget reform and tax reform, in particular.

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •