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How the U.S. elections might affect markets – 4 key charts

Ameriprise Investment Research Group

Oct. 24, 2022

 

How might the U.S. elections affect the markets?

It’s a question that many investors are asking ahead of the 2022 midterms.

Here are four charts that help explain the dynamics between midterm elections and the stock market, as well as our view on how equities might react to this year’s election:

Market returns during a midterm election year tend to follow their own rhythm

Monthly stock returns vary throughout the year as investors respond to various catalysts. However, midterm election years have their own patterns. Stocks historically perform better later in the year as the election nears and finally reaches its conclusion compared to non-election years. With that said, stocks tend to underperform earlier in the year as primaries and key races unfold.

 

Sources: Bloomberg, S&P Dow Jones Indices. S&P 500 market returns during election years based on calendar month. Midterm election years reflect only years with a midterm election. Non-election years are years with both no midterm election and no presidential election. Data as of 09/30/2022, beginning in 1946.

 

 

 

Midterm election years are often marked by higher market volatility

Market volatility tends to rise in the fall during both midterm election years and non-election years. However, midterm election years tend to have higher volatility both pre-and post-election. During this period, investors are often attempting to discount what the composition of Congress could mean for fiscal policy and potential changes to regulation and taxes.

 

Sources: Bloomberg, S&P Dow Jones Indices. S&P 30-day volatility during election years based on calendar month. Data as of 09/30/2022, beginning in 1946. Non-election years are years with both no midterm election and no presidential election.

 

 

 

Volatility may peak before election day, but then normalizes thereafter

As the chart below shows, stock volatility historically tends to peak 20 to 25 days ahead of a U.S. midterm election. Notably, volatility then tends to fall as the midterm election draws closer, finally ebbing back toward more normal levels, usually 15 to 25 days post-election. Historically, stocks perform better later in the year as the election cycle nears and finally reaches its conclusion compared to non-election years.

 

Sources: Bloomberg, S&P Dow Jones Indices. Average S&P 500 total return 30-day volatility, 60 trading days prior to elections and 60 trading days after the election. Data as of 09/30/2022, beginning in 1992.

 

 

 

Higher market returns tend to follow midterm elections

Historically, the S&P 500 has seen lower returns heading into the midterms and higher returns afterwards as there is typically more clarity on what the makeup of Congress could mean for fiscal policies.

 

Sources: Bloomberg, S&P Dow Jones Indices. Data as of 12/31/2021 based on calendar months beginning in 1945. Since we do not have pre- and post-2022 elections data, this data includes midterms up through 2018.

 

 

 

Our view on the potential market impact of the 2022 midterm elections

Election impacts can play a role in tilting market dynamics longer-term. However, we do not anticipate November's midterm election results will change near-term drivers materially and if a divided Congress is the result. In our view, this year's election is taking a back seat to other more pressing market matters, such as the path of inflation, the level of interest rates, and the direction of economic/profit growth.

If you have any concerns about the market volatility that may precede or follow the upcoming election, reach out to your Ameriprise financial advisor. They can show you how your portfolio was built to weather different market cycles and political cycles.

 


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