There’s a lot of talk about historical and technical data points right now. Market historians are trumpeting the rare strength of the Dow in September, chart watchers are talking about the recent dollar “death cross,” and gold bugs are plotting a new all-time high above $1,300 for the precious metal.
But one area that I haven’t seen a lot of chatter on – at least not yet – is the impact of the midterm elections on the market. So allow me to humbly submit my analysis of the upcoming Nov. 2 contests and what they will mean for the market, based 30 years of data and 15 federal elections.
1. The market is significantly stronger after a midterm election
2. The market is significantly weaker if Senate leadership changes
3. The market is significantly stronger with Republicans in power
An in-depth analysis of each point follows, and a complete table of my data and methodology is at the very end for you number geeks. And keep in mind as you read that the average return for a two-year period from one federal Election Day to the next since 1980 is 19.8% (the median return is 22.9%). That will be useful for comparison sake.
Midterms Are Time to Buy
The old adage “sell in May and go away” is well-documented. The 2010 Stock Trader’s Almanac showed that investing from only November to April from 1950 to 2009 would generate 7.4% returns on average for each six month period, compared with 0.4% gains for each yearly May to October period.
Well, if you’re a market timer you may be interested to know that a similar disparity exists between election cycles – with the two years between midterms and presidential elections significantly outperforming the two years opposite.
Tracking the S&P from the day of the presidential vote to the midterm vote (back to 1980), investors would see an average return of 15.9% and a median of 12.9%. That includes projected returns for the current cycle. However, if you were to buy at midterm elections and sell on the day of the next presidential ballot, you would enjoy average returns of 23.6% for each two-year period and median returns of 26.4%. That’s nearly twice the returns.
And remember, the average across all two-year election cycles is 19.8% so that’s beating the norm by a significant amount. That means buy now – and sell in two years when Barack Obama is up for re-election.
Leadership Changes are Bad for Wall Street
Conventional wisdom sometimes argues that political gridlock is good for the market, since neither party has enough power to inject uncertainty into the market with sweeping legislative efforts. However, history shows that a change of power in the Senate is typically bad for Wall Street and a comfortable majority is better for investors.
Dating back to the 1980 change of power in the Senate thanks to Ronald Reagan’s influence on the GOP ticket, there have been four recent changes of control in the U.S. senate – 1980 presidential election, the 1986 midterm, the 1994 midterm and the 2006 midterm. The two-year returns after those power shifts are dramatically worse than any other period, averaging a meager 10.7% and a median of 8.3%.
There isn’t a big body of work here with only four changes of power — and to get a fifth Senate leadership change, you’d have to go all the way back to 1954. But the trend is significant.
And if you’re interested in the breakdown by party power shift, the GOP has fared better with returns of +4.7% in 1980-1982 and +53.4% in 1994-1996, while the Democrats tallied +12.0% from 1986-1988 and a loss of -27.3% from 2006 to 2008.
A Republican Senate is Good for Stocks
I’m not going to latch on to that outlier from 1980-1982 and hold it up as proof that the market rallies when Republicans take the reins of the Senate. Two data points just isn’t enough for me – especially when the other is dramatically different. However, after looking at the numbers it is safe to claim that a Republican Senate is actually better for the stock market.
Fiscal conservatives and free-market libertarians insert your “No kidding!” here.
When you tally the election cycles where the GOP held the Senate majority and the cycles when the Democrats were in power, you see a significant disparity in the S&P’s performance. The average return during two years of Democratic leadership is +13.7% with a median of +12.6%. The average return during two years of Republican leadership is +24.5% with a median of +23.9% — about double.
Remember, the average return for a two-year election period since 1980 is +19.8% with a median return of +22.9%. That makes a pretty compelling case that Republican Senate control is in the best interest of investors.
Disclaimers and Data
A few notes before I show my table of data:
- In case it’s still unclear, returns are for the S&P 500 index for the period from close on one federal Election Day to the next federal election two years later.
- I chose 1980 as the starting point because that is when the GOP took back power of the Senate after 26 years of Democratic control. Including data before that point wouldn’t alter GOP numbers at all – and since the S&P 500 was established in its present form in 1957 and the next change of power was back in 1954, numbers aren’t reliable. Also, the only info that would be added is the average return with Democrats in power – and for those who are curious, those returns from the S&P 500’s formation on March 4, 1957 to Election Day 1980 were 7.6% annually or 15.2% for each two-year cycle. That’s only slightly better than data since 1980 and still below the average election cycle returns since 1980.
- When referring to a Senate “majority,” independents caucusing with parties are included in totals. And after the 2000 vote that split the Senate 50-50, the GOP majority included Vice President Dick Cheney’s tie-breaking vote
- The balance of power and figures for Senate makeup are totals at time of Election Day and do not include special elections in intervening years due to deaths, retirements and other events.
- For projected returns through Election Day 2010, I simply used a round number in the ballpark of the S&P’s recent closes across the last two weeks.
- I welcome any additional trends any of you can find, or corrections to my calculations if you find them. Comment below — and shameless plug, subscribe to my Twitter feed for updates and follow-ups as the election approaches. The account is only a few days old, so tell your friends.
Enough — here’s the raw data. Sources are all public and unglamorous, such as Yahoo! Finance for quotes and Wikipedia for election dates and results.
Jeff Reeves is editor of InvestorPlace.com. Follow him at https://twitter.com/JeffReevesIP.
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