The correlation between stock market performance and midterm elections is well documented. In 17 of the 19 midterms since 1946, the market performed better in the six months following an election than it did in the six months leading up to it.
Out of sync
This year's market performance has already diverged significantly from the average midterm election year.
Source: Charles Schwab, Bloomberg, as of 09/01/2022.
Returns are for midterm election years going back to 1930. For illustrative purposes only. Past performance is no guarantee of future results.
So, with the upcoming midterms on November 8, can investors expect similarly strong post-election performance well into next spring?
"Post-election outperformance is often driven by the market's expectation of increased government spending from a new Congress," says Liz Ann Sonders, Schwab's chief investment strategist. "But an additional infusion of funds seems unlikely this year, given the government's historic levels of spending and stimulus in response to the pandemic." In fact, all that money is one contributor to the 40-year high in inflation, and any new spending would likely exacerbate the issue.
"The combination of high inflation, the war in Ukraine, and a lingering pandemic has already made this cycle unlike prior midterm years," Liz Ann says. "With so many other forces at play in the market, I wouldn't put much weight in historical midterm-year performance."
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Correlation is a statistical measure of how two investments have historically moved in relation to each other, and ranges from –1 to +1. A correlation of 1 indicates a perfect positive correlation, while a correlation of –1 indicates a perfect negative correlation. A correlation of zero means the assets are not correlated.
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