Elections may mean gains for 401(k)s
History shows Dow rallies after midterms
As stock market reactions go, the rally on Wednesday following news of a divided U.S. government was about as far from a scary Brexit-like moment as you could get.
Power, politics and money collided following Tuesday’s midterm elections, as the Democrats snatched back control of the House, prompting stocks to do what they have historically done once election uncertainty fades and clarity over the outcome emerges.
They rose. The Dow Jones industrial average and broader Standard & Poor’s 500 index each rallied more than 2 percent on Wednesday, the first full day of trading following the midterms.
“Markets like certainty, which we now have, and the split result is what (Wall Street) expected,” says Thorne Perkin, president of Papamarkou Wellner Asset Management in New York.
So what comes next for markets? And what does the shifting political landscape mean for 401(k) investors and their money?
Looking at the big picture, history shows the midterm elections act as a launching pad for stocks. The S&P 500, for example, has been higher a year after every midterm election since World War II. It’s been a perfect 18 for 18.
And over the past 50 years, the large-company stock index has risen an average 16 percent in the year after a midterm vote, Capital Economics says.
The Dow also tends to go into rally mode after the midterm votes are counted. The blue-chip stock average has risen 4 percent, on average, in the fourth quarter of midterm years and followed that up with gains of 5.2 and 3.6 percent in the following two quarters, according to LPL Research. That nine-month stretch is the best of the four-year “presidential cycle.”
“The outcomes (of the midterms) matter less than the end of the campaign,” explains Kate Warne, market strategist at Edward Jones.
Even though Republican President Donald Trump’s colleagues in the GOP lost control of the House, divided government, Wall Street history shows, can lead to strong market returns. That’s mainly because legislation that might get in the way of economic growth or make it harder for companies to make money never gets passed.
“Historically, divided governments have been good for markets,” says Brad McMillan, chief investment officer at Commonwealth Financial Network.
Why? “There’s no real policy changes, as Republicans and Democrats can’t agree on much,” he says.
The new balance of power in Washington, D.C., points toward a positive market reaction. The S&P 500 has gained 10.8 percent, on average, when there is a Republican president and the breakdown in Congress is a Republican-controlled Senate and a Democrat-led House, data from Strategas Research Partners show.
Wall Street investors saw the Dow surge more than 545 points Wednesday.