Macro views
Macro views

U.S. Mid-term elections: Tuning out the noise

Quick takes on capital markets

October 14, 2022

Many investors are likely keeping a close eye on the upcoming mid-term elections and what the potential outcomes might mean for their portfolios. Historically, however, both midterm elections, as well as the political makeup of the subsequent U.S. government, have very little impact on market performance.

Equity market performance by government control
S&P 500 price returns, 1928-July 2022.

Bar chart of the S&P 500 annualized median returns and annualized average returns from 1928- July 2022, showing equity market performance by government control

Bloomberg, Principal Asset Management. Assumes being wholly in or out of the market based on political control. Data as of October 13, 2022. Note: A Republican controlled government had a lower average return over the analysis period, but this was skewed significantly lower by the Great Depression period. The median return, on the other hand, was meaningfully higher.

The U.S. mid-term elections are less than a month away. According to polling data analysis website FiveThirtyEight, as of October 13, Republicans have a 70% chance of gaining control of the House, while Democrats have a 67% chance of controlling the Senate. Although a divided government is still the most likely outcome, it is certainly not assured.

While the three months and six months after an election tend to be marked with strong equity market performance (up on average 6% and 11%, respectively)1, this positive market reaction is most often attributable to the resolution of uncertainty, rather than a response to any specific policy agenda or election outcome. Indeed, the make-up of the government—be it divided or unified, Democrat or Republican controlled, a shift in power or reinforcement of the status quo—does not have a statistically significant impact on market returns.

Therefore, rather than allowing political uncertainty to dictate investment decisions, investors should be focused on the economics that will be responsible for market returns in the periods ahead. Today, it is inflation, the Fed’s response to elevated inflation, and resulting risk of recession, that will be what determines the market’s direction over the coming quarters.

Tune out the political noise: It’s the economics that will be the key long-term driver of market performance.

1Analysis is over the time period 1928 through July 2022.

Disclosure

Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results and should not be relied upon to make an investment decision.

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