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Will the stock market rally after the midterm elections?

Yahoo Finance Live’s Brian Sozzi provides his take on how stocks tend to trade in the quarters after a midterm election.

Video Transcript

- Forget about jobs-- the midterm elections will be here before you know it. On November 8, the Democrats are expected to win the Senate. The Republicans are seen winning the House, but of course, anything could happen, ultimately. And before the midterms, there will be a Federal Reserve meeting on interest rates on November 2. That decision and the stock market reaction could then affect election turnout and influence how stocks end the year.

Sozzi has more numbers behind all of this on his take. Like, forget about jobs. We're all focused on jobs today. You're always a step ahead, Brian Sozzi.

BRIAN SOZZI: Yep. Yeah, well, when everybody zigs, I usually try to zag. So I might be the only one in financial media talking about the midterm elections today, which is good because that's what we're here for at Yahoo! Finance-- prepare investors for what might come three, six months down the line, or in this case, November 8.

So we're looking at the midterm elections. And of course, before that, you have that Fed meeting on November 2. But here's what we have up for grabs here, just to set the scene for those midterm elections-- lots up for grabs, and hence, you will probably see the market really focus on all things midterms.

We have an interesting chart too, just to get a vibe of the economy into Election Day. And it's the misery index that comes compliments from the team at Jefferies. It is essentially the unemployment rate plus the inflation rate. And you've seen that spike as a result as consumers battle, obviously, high levels of inflation.

Now, in terms of stats, I want to just zoom in on a couple interesting ones here from U.S. Bank that caught my attention. The S&P 500 has historically outperformed the market in the 12-month period after a midterm election, with an average return-- get this, guys-- about 16.3%. That is pretty good. I will also note the last time the S&P 500 produced negative returns during the 12 months after a midterm election was 1939. Well, what was going on there? As a reminder, because we were not on this planet, that was the Great Depression in World War II.

So I think the market is going to be coming up against a lot of headwinds and concerns regarding this. We talked to Lori Calvasina yesterday at RBC saying, you know, that when she talks to her clients, they wouldn't mind Republicans getting a little more control of things here, maybe some divided government, maybe some of those more aggressive areas of the Democratic agenda don't get through, maybe markets like that. But again, that's a lot of ifs, and that's a lot of wins.

And my take here, going back to an old-school James Carville quote, "It's the economy, stupid." And I think it will be very interesting to see how voters come out here on the 8th. Do they vote with the economy, or do they find something else, another issue they're very focused on?