U.S. stocks typically ride midterm elections to solid gains
Regardless of how midterm elections turn out, Wall Street usually ends up a big winner.
The S&P 500, the stock market's benchmark index, has climbed in the 12 months after each of the midterm elections going back to 1946. That's 18 elections, many of which ended up shuffling the balance of power in Congress.
"It turns out that under every political makeup in Washington, stocks have gone up and the economy has grown," said Kate Warne, an investment strategist for Edward Jones.
In midterms going back to 1946, the S&P 500 index had an average price return of 16.7 percent in the 12 months after the elections, according to CFRA.
Right now, polls show Democrats taking control of the House in the Nov. 6 elections while Republicans retain control of the Senate. One popular adage is that Wall Street likes gridlock in Washington, because it creates less uncertainty and diminishes the likelihood of major legislation that could upset the markets.
"There are big issues that need to be resolved and gridlock means those get deferred or pushed forward," Warne said. "That's disappointing but doesn't necessarily mean market returns are bad."
True, they're not bad. They're just not as good as in the other scenarios.
"The best scenario (for the market) is when one party controls all branches of government," said Sam Stovall, chief investment strategist for CFRA. "The second best is a unified Congress. The worst is a divided Congress."
Recently, markets have had other worries beside the elections. After a solid third quarter that saw records for the S&P 500 and Dow Jones industrials, stocks have swooned on fears that rising interest rates and the U.S. trade dispute with China could undo some of the benefits of the GOP tax cuts and eventually squeeze corporate profit margins.
The length of the current bull market, now at more than nine years — the longest ever — also has some investors worried that stocks are overdue for a severe pullback.
Currently, the U.S. economy is growing at the best clip in years. The earliest most experts see a recession in the U.S. is 2020. And Wall Street continues to expect solid growth from companies reporting third-quarter results the next few weeks.
History shows that voters have been more likely to support incumbents when the economy is strong, which could be good news for the GOP. But history also shows the president's party typically suffers big losses in the first midterm elections after taking office. In recent history, the party holding on to the White House lost the majority in one or both houses of Congress in every midterm going back to 2002.
So, investors must prepare for anything. The outcome of the elections may have policy implications that could affect some sectors of the market, including banking, companies that would benefit from government infrastructure projects and those that rely on healthy consumer spending, analysts say. It just depends on which party is in control.