U.S investors may have been destined to endure a volatile 2022.
Two examinations of the effect that midterm elections can have on equity markets—one by Carson Group and one by Capital Group—show that even without inflation, interest rates and the war in Ukraine, investors probably were in for a bumpy ride this year.
“Midterm election years historically have been quite volatile. The average pullback is 17.1% peak to trough, so we knew that coming into the year,” said Ryan Detrick, chief market strategist for Carson Group in Omaha, Neb. (According to the Wall Street Journal, the equity markets were already near-average at a 17.3% decline through August.)
The good news is what happens in the tail-end of the year and beyond.
“Once you get to the midterms and the election, if you go one year out from the low, stocks have always gone up, since World War II,” he said.
And sometimes significantly. According to Detrick’s research, a year out from the average decline of 17.1% saw the sweet reversal of an average gain of 32.3%.
Both Carson Group and Capital Group, headquartered in Los Angeles, looked at equity market returns in the midterm year, the year following and then through the lens of how unified Washington, D.C. was. Their methodologies differed in terms of which years they included in their data as well as in terms of how granular they got in crunching some of the results.
Regardless of where the two methodologies diverge, both Carson Group and Capital Group agreed that the year following the year of a midterm election saw an average annual return for the S&P 500 of 14.1% and 15.1% respectively, compared with 7.1% for all other years, which could be very good news for 2023.
Another sign of volatility in a midterm election year is the game of Movable Chairs played in the House and Senate. Commonly, the party of the president loses seats in both branches of congress. But, surprisingly, this has less impact on returns than investors might think, both sets of researchers found.
The Capital Group’s research, led by political economist Matt Miller, found strong returns the year following an election when there was a unified government where both branches of congress and the president were from the same party (a 10.4% return), and with a split congress (10%). An oval office and a congress held by different parties realized the lowest returns (7.4%), still well into positive territory.