The market usually rises after the midterms. Will it be different this time?

The problems in these elections are enormous, and the enormous differences between the two political parties are well described.

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But for the stock market, history suggests that election results may not matter much. Shocking as this may be, the midterm elections since 1950 have sparked a stock rally, no matter which party won, and no matter the trouble.

The market generally shrunk in the months leading up to the midterms and then flourished. And it often excelled in the year after the midterms, usually the best of the four-year presidential cycle.

Ned Davis Research, an independent investment research firm, compared stock returns from 1948 to 2021, broken down by the four years of a standard presidential term. It used the S&P 500 and a predecessor index:

12.9 percent for year 1.

6.2 percent for year 2, the year of the interim tests.

16.7 percent for year 3, the year after the midterms.

7.3 percent for year 4.

The data was similar for the Dow Jones industrial average dating back to 1900.

But why? There is no certain answer – and it could even be a series of coincidences – although there are plenty of explanations. What I prefer is that presidents are politicians who try to stimulate the economy – and indirectly boost stocks – for maximum effect in presidential elections.

Their first year in office is the best time to take politically painful steps, often leading to weak markets by the time the midterm elections come. However, after losses in the midterm elections, presidents are trying to boost the economy through expansionary fiscal and monetary policies, preparing themselves (or their successors) well for the election.

Is this an exception?

Two powerful factors — the negative effect of a slowing economy and the positive impact of the midterm elections — could be in conflict, Ed Clissold, chief US strategist at Ned Davis Research, said in an interview.

On the upside for equities, Wall Street usually responds well to a stalemate — the standstill that can grip Washington when power is divided — and one such division is the consensus expectation for the interim terms. But over the past century, when bear markets were associated with recessions, a bear market never ended before a recession started, Mr. Clissold. The last recession in the year after the midterms came after the 1930 elections, during the Great Depression, a terrible era for stocks and the economy.

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