The 2014 midterm election is set to be the most expensive midterm in history. Candidates, the parties and outside interest groups are expected to spend $3.67 billion dollars beating by a nose 2010's $3.63 billion. This year marks a dramatic shift away from small-time donors and towards big-name, big-money fundraising (no doubt a result of Citizens United.)
But here’s the kicker for investors: if you want to play the market after the election, it doesn’t matter who wins.
Yahoo Finance spoke with S&P Capital IQ's Sam Stovall about how the market performs following a midterm election and there’s good news. It’s almost certainly going up, and it’s going that way whether Republicans or Democrats declare victory.
“In a midterm election year remember that the six best months of the year as identified by the Stock Traders’ Almanac shows that the November through April period has risen an average of 15.3% since World War II and has advanced 94% of the time,” he said.
Narrowing it down a bit, Stovall said, “[Stocks increase] about 3% in October, historically, 2.5% in November and then 2% in December - so a bit of a downward stair step but all three months historically have been positive.”
In fact – the Stock Traders’ Almanac recently broke it down even further – looking at how the markets performed five days before (i.e. the period we’re in now) and three days after the midterm and found, “An impressive 2.7% has been the average gain during the eight trading days surrounding the midterm election days since 1934.”
The real play, though, is in the long game according to Stovall. “If you wait 12 months, meaning October to October in that third year (of a Presidency), the market has risen 17 of 17 times since World War II gaining an average of 17.5%,” he said.
Of course we all know that past performance doesn’t guarantee future returns, but there is some logic behind the trends. For reference, bear markets tend to occur during midterm election years, reaching their bottoms in October. And while we’re not in a bear market now, nor have we seen a true correction, we did have a significant dip up until the 17th when things reversed.
“It does imply that usually there is an uncertainty running up to that election and that investors then realize [after the midterms] that the party in power wants to get re-elected and will try to stimulate the economy further in year three that will bear fruit in year four so they or their party gets re-elected,” said Stovall.
Now if you want to break down which stocks or sectors in particular will do well – that probably does get partisan. For example, if Republicans take control of both houses of Congress, the Keystone pipeline is more likely to win approval and energy stocks are likely to benefit.
But if you just want to know which way stocks are likely to go after next Tuesday’s vote? Take a cue from the Stock Traders’ Almanac, which recently said that in the battle between donkeys (Democrats) and elephants (Republicans) the bulls come out on top.