Midterm election jitters: what history shows about stocks

Nearly half of U.S. investors surveyed — 48% — say they are concerned about the midterm elections' potential impact on the stock market, according to Morgan Stanley Wealth Management's quarterly retail investor pulse survey, conducted Oct. 1-23 among 953 U.S. investors. Voters go to the polls Nov. 3, and historical data offers some perspective on how stocks have behaved around past midterms.

Investor anxiety ahead of Nov. 3

A separate survey by the Nationwide Retirement Institute, the research and education division of insurer Nationwide, found 56% of respondents said they feel more anxious because of the elections, and 75% believed the results could meaningfully affect their long-term financial plans. That survey ran Aug. 24-Sept. 11 among 2,029 investors with investable assets of at least $10,000.

"This summer and fall, the midterms have been probably the first topic of conversation with almost every [client] meeting that I've had," said John Mullen, managing director, president and CEO of Parsons Capital Management in Providence, Rhode Island.

Voters head to the polls amid broad concerns about affordability and dissatisfaction with President Donald Trump's handling of the economy, while the buildout of artificial intelligence through data centers and the Iran war also weigh heavily on voters' minds. Republicans control both chambers of Congress.

A difficult cycle for the president's party

Midterms have historically been unfavorable for the president's party, which has gained House seats in only three such elections since 1906, according to an analysis by Michael Townsend, Charles Schwab's managing director of legislative and regulatory affairs.

Democrats are favored to take the House, leading Republicans on a generic ballot by about 9 percentage points as of Oct. 28, according to FiftyPlusOne, which tracks poll results, and are narrowly favored to win the Senate, according to forecaster DecisionDeskHQ. The new Congress is scheduled to convene Jan. 3.

What the data shows

Janus Henderson's analysis of the S&P 500 over the past 50 years found heightened market volatility when power in Washington is split, but little difference in annualized price returns under unified or divided government — 8.73% and 9.24%, respectively. "Higher volatility during years with split control may have been caused by policy uncertainty, but a counterargument is that split government potentially insulated voters — and the economy — from some of the most ambitious intentions of a single party," wrote Seth Meyer, the firm's global head of client portfolio management. "In short, gridlock may be good."

Capital Group found median annualized volatility in midterm years since 1970 has been nearly 16%, versus 13% in other years.

After the midterms, "in almost every case, we've seen a rebound as the market settles into the known," said Michael Gibb, president and CEO of Godsey & Gibb Wealth Management in Richmond, Virginia. Schwab's analysis found the S&P 500 averaged a 5.7% return in the three months after a midterm, positive in 11 of the 13 years studied, and 12.4% over six months, positive in all 13.

Fidelity Investments' 2024 study of returns from 1950 through 2023 found average gains of 3.4% in the second year of the presidential cycle, when midterms fall, compared with 14.7% in the year after.

Post-midterm economic growth has been mixed: across 19 cycles from 1950 through 2022, growth accelerated in nine, slowed in nine and was unchanged in one, according to Sung Won Sohn of Loyola Marymount University and SS Economics.

Rebalancing

Gibb said investors left overexposed to stocks by the multiyear bull market may want to return to their intended risk tolerance "in a calculated and non-emotional manner," but that clients whose allocations are on target should not change. Mullen said investors uncomfortable with their asset mix, or for whom it is too risky, have to make a change.

Source: CNBC Top News.