When a midterm election draws near, markets often become increasingly volatile.
“These months are historically the weakest for the market in a presidential term,” reported the New York Times in April. And this year, things are especially complicated. Investors are already dealing with unprecedented macroeconomic headwinds, from the continued spread of Covid-19 to Russia’s invasion of Ukraine. As Dan McMillan, founder and executive director of Save Democracy in America told InvestorPlace, “Political risk experts increasingly warn investors about America’s unstable politics, and partisan polarization has dramatically escalated.”
It is certainly true that investors have plenty of cause to proceed with caution.
But while the current market volatility is well in keeping with history, there’s evidence to suggest that in the months following the 2022 midterm elections, stocks could easily reverse direction and start rising. Markets have seen this phenomenon play out following many previous election cycles. Savvy investors should be getting ready now for stocks to skyrocket into 2023 and beyond.
Stocks and Midterm Elections: What to Know
Earlier in September, InvestorPlace analyst Luke Lango took investors through the outperformance cycle that midterm elections generate.
Midterms are always bullish for stocks. Not usually bullish – . History proves that stocks rise after the midterms. And when stocks sell off going into them, the gains are especially large.
A report from U.S. Bank backs up Lango:
The S&P 500 has historically outperformed the market in the 12-month period after a midterm election, with an average return of 16.3%. This is especially true for the one- and three-month periods following midterm elections, which historically have significantly outperformed years with no midterm election.
This begs the question: Why do markets rebound so well after months of midterm-driven volatility?
One popular theory chalks it up to the fact that election results lead to more certainty. After months of wondering which party will retain or take back power and which sectors will be most affected, investors finally know. At the very least, they are able to make investment decisions with more confidence, thereby spurring market activity and helping certain sectors rise.
Regardless of the reasoning, savvy investors should be asking how to prepare for the boost that markets will experience following the 2022 midterm elections.
There are multiple important strategies for investors to employ to stay ahead of the curve. Andrew Schrage, CEO of MoneyCrashers.com, sees significant opportunity in multiple types of funds. As he told Investor’s Business Daily:
Both large-cap funds and equity-income funds make sense for investors looking to capitalize on a potential market upturn after the midterm elections without exposing themselves to riskier sectors and styles.
For those looking to cash in on the market’s expected outperformance, Schrage recommends the Vanguard Large Cap Index Fund (NYSEARCA:VV). For those who prefer mutual funds, he recommends the Vanguard Large Cap Index Fund Admiral Shares (MUTF:VLCAX).
What Happens in a House Divided?
One additional prediction heading into November is that the midterms will result in partisan gridlock.
Recent polling data supports this, indicating that Republicans will retake the House of Representatives. According to Ameriprise Financial Chief Market Strategist Anthony Saglimbene, investors can prepare for this outcome through focusing on healthcare stocks, financial stocks and tech stocks. Why? A divided Congress may be less likely to push through significant regulation that could jeopardize companies in these sectors.
This prediction is similar to one from Tradier CEO Dan Raju, who recently told InvestorPlace that tech and finance are two of the primary sectors likely to benefit from the anticipated Republican victory. This means that companies with ties to both are among the stocks to buy to benefit from the midterms.
The Bottom Line: Prepare for a Stock Market Boom
As the midterms approach, there is plenty of uncertainty, as can be expected with any election. But there’s no denying that history is on the side of investors. As Lango notes:
There have been 20 midterm elections since World War II. Every time, stocks rallied over the following year. And it’s not just 90% or 95% of the time. Stocks have rallied after midterm elections 100% of the time.
On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.