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Mid-Term Elections Impact

Many believe that Republicans will win back a large number of congressional seats and could even potentially win back control of Congress during the upcoming mid-term election cycle.  Accepting this as a likely reality, the question then becomes what the impact will be on the stock market, as a whole, as a result.

 

Traditionally, the third year of any presidential cycle has been positive for the U.S. stock market.  In fact, according to Mark Hulbert, as written in his October 4th MarketWatch article entitled, “Who cares about gridlock?”, since 1945, the average gain of the DJIA has been 24.7% in the third year of a presidency compared to 4.0%, 1.9% and 3.3% for years 1, 2 and 4 respectively.  Drilling down further into this data, the table below displays the apparent affect of a split between the party in the White House and the party with Congressional control on the stock market.

Gridlock prevails before mid-term elections

Gridlock prevails after mid-term elections

Dow’s average return in 3rd year that follows

# of instances since 1945

No

No

16.9%

4

No

Yes

19.0%

4

Yes

No

22.2%

1

Yes

Yes

29.3%

7

Source: Mark Hulbert, “Who cares about gridlock?” MarketWatch, October 4, 2010

 

While there is a difference, surprisingly the difference is not a large as you might expect and all scenarios result in positive overall performance for the third year of a presidency.   Perhaps even more interesting is that the best scenario for the third year of a presidency appears to be a split government heading into the mid-term elections and a split government after the mid-term elections.  Gridlock, in this sense, is not necessarily such a bad thin