The S&P 500 has posted positive fourth-quarter returns in all but three midterm election years since 1934. The main hitch for those periods of negative returns was a Fed that raised rates.
Given this history, should investors now be worried? In September the central bank raised its benchmark by a quarter-point to a 3.75% to 4.00% range. All things being equal, fears of a post-midterms market slump could have merit.
Instead of joining the doomsayers, however, we would accentuate some positives. First, the central bank paused this month, meaning it may be less likely to raise rates from here and, second, a more restrictive monetary policy seems already priced in. Also, history appears to favor the optimist: equities have often rallied from the midterms into the first half of the following year, likely because the market hates uncertainty and most elections have a helpful habit of reducing that.
Yet the election can only decide so much – and even things that aren’t being voted on may make waves. The Iran war could potentially intensify, for instance. Equally, it could be that, post-election, the parties will be more receptive to a peace deal. And what of monetary policy? Chair Warsh denied that the upcoming midterms caused the Fed to pause last week, but that won’t be a consideration for the next FOMC in December. As for AI, would a Democratic Congress put the brakes on the data center buildout? That’s really more of a state and local issue, but even to the extent that it is a federal question it’s hard to see the government reversing course on a matter of such economic importance.
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