Special Commentary – Election quick take

Following the historical tendency, the president’s party lost congressional seats. The initial market response has been positive as simply moving past the election removes a degree of uncertainty.

In addition, overnight markets rallied, in part due to President Trump indicating he was prepared to work with Democrats, while also downplaying the likelihood of intensifying attacks on Iran after the election, as had been rumored.

Our take

Markets have historically experienced choppier conditions through the summer of midterm election years, followed by a rally beginning around the election and continuing through year-end. To date, we continue to loosely follow that pattern.

That said, while elections matter, they are only one of many factors that influence financial markets, and they should not be viewed in isolation.

Key stats to know

An objective review of the historical evidence suggests that Washington’s perceived influence on market returns is often overstated.

• The president’s party has lost congressional seats in 21 of the past 24 midterm elections, looking across both the House and Senate.​
• Notably, since 1946, stocks have been higher one year after every midterm election, including all four instances when both the House and Senate flipped to the party opposing the president. Simply moving past the uncertainty of the midterms has also often led to a relief rally.
• Part of that consistency is likely attributable to no recessions having occurred during the third year of the presidential cycle. If the recession pattern were to break, the strong third-year market pattern could break as well. That said, a recession is not our base case.
• Politics has been a poor reason to leave the market. Since 1946, $1,000 grew to more than $6 million by staying invested, far exceeding the $163,000 and $37,000 outcomes from investing only under Democratic or Republican presidents, respectively¹. The precise ending values are less important than the broader lesson.
• Markets have generated positive average returns across all political configurations. The weakest results occurred with a Republican president and Democratic Congress, the new political configuration, but the average was heavily influenced by five double-digit down years that coincided with recessions.
• Despite meaningful policy differences, the S&P 500 generated annualized returns of 12% to 16% under the four most recent administrations, all above long-term averages².
• That pattern extends beneath the surface. Sector performance has often defied conventional political narratives. Tech consistently ranked among the strongest-performing sectors, while health care and industrials remained resilient across different political agendas, for example.

Bottom line

The initial market reaction has been positive as investors move past election uncertainty, supporting our view to give the bull market the benefit of the doubt. Still, the path of the economy, earnings, AI, and interest rates will be key to extending the market’s uptrend. Elections matter, but collectively, we expect these other factors to matter more for markets.