- The US midterm elections will be held in under two months time.
- Analysis from Bank of America Merrill Lynch reveals stocks tend to perform strongly just before and for a substantial period after midterm elections, at least based on historic patterns dating back to 1928.
It describes this phenomenon as “the sweet spot of the Presidential Cycle” for stock investors.
US midterm elections will be held in under two months time, adding an extra layer of uncertainty for stock market investors to navigate.
However, if history is a guide, any selloff that may eventuate before they’re held on November could offer investors an opportunity to position for further gains in the months ahead.
The chart below explains why.
From Bank of America Merrill Lynch (BAML), it shows the historic price performance of the S&P 500 during a midterm election year going all the way back to 1928.
Typically, stocks tend to weaken modestly ahead of the midterms before rallying home into year-end.
As BAML explains, not only are the gains typically strong in December quarter, they’re also very frequent.
“Midterm year 3-month seasonality tends to flip to positive from negative in August to October,” BAML says. “The S&P 500 has been up 86% of the time with an average return of 6.37% during Q4 of a midterm year.”
And not only does history suggest the midterms could well be good news for stocks, they also typically herald gains in the post-election period.
“Since 1928, Q1 of Presidential Year 3 has been up 82% of the time with an average return of 5.41% and is the strongest 3-month period of Year 3,” BAML says, adding that in overall terms, the third year of a Presidential term also tends to see “well-above average 3-month returns through August”.
“This means that after a summer lull, the Presidential Cycle can be quite strong from Q4 in a midterm year through to August in Year 3.
“This is the sweet spot of the Presidential Cycle.”
While past performance is not indicative of future returns, for those who are fans of historic patterns and willing to invest based on them, it does provide some food for thought.
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