America will vote again in November. On the ballot in this midterm election are 35 Senate races that will determine who controls the upper house of the United States Congress. According to government insiders, the White House has tempered confidence in the midterm elections and is now concerned that Democrats could lose control of both houses of Congress. The next two years of Joe Biden’s administration will have significant repercussions if one or both Houses of Congress are lost. Kevin Matras, Executive Vice President of Zacks.com, says, “Of particular interest is the mid-cycle part, and that’s where we are now.”
And how is the stock market reacting to the midterm election results? “S&P 500 midterm election year seasonal pattern since 1946” doesn’t paint a rosy picture for 2022, said Jeff Hirsch, editor of the Stock Trader’s Almanac & Almanac Investor Newsletter.
Kevin Matras mentions in his newsletter that there is a theory developed by Yale Hirsch of the Stock Trader’s Almanac that suggests that the stock market follows a pattern that correlates with the four-year term of a US president. The election cycle consists of the post-election years, the midterm elections, the primaries, and the election years. 2022 is an example of a midterm year, i.e. the second year in the 4-year presidential cycle.
In the first two years after an election, the second year is usually the weakest. In fact, it is the weakest of all four years. Congressional elections are taking place – and with them they can change the political background.
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Hirsch found that wars, recessions, and bear markets tend to start in the first two years of a president’s term. In 2022, the market entered the weak spot of the cycle. And with an aggressive Fed, high inflation and the ongoing war between Russia and Ukraine, the weakness in stocks was exacerbated.
Those who know their market history will find it unsurprising that the start of this year was rough. The second and third quarters of the intervening years are historically rather weak. (History repeats itself again.)
But generally more prosperous times lie ahead in the second half of the cycle.
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In fact, we are entering the most optimistic part of the calendar – the fourth quarter of Year 2 in the 4-year presidential cycle (the second strongest quarter of all 16 quarters), with an average return of 6.6% (since 1950 ); and Q1 of Year 3 (the strongest quarter of all 16 quarters), with an average gain of 7.4%.
And when we consider that the third year of the presidential cycle has historically witnessed the best performance of all four years, the outlook for stocks looks even brighter.