Why stocks could rally through the midterm elections
Stocks have been on a roll in recent days, pushing to new record highs as investors celebrate the makings of a trade agreement between the U.S. and Mexico. And Canada could be ready to join the deal. All of this suggests a calm is coming after President Donald Trump launched his aggressive trade policy strategy earlier this year.
Heading into the midterm elections, an analysis by UBS suggests equities will enjoy further tailwinds from here, even though projections suggest Democrats stand to gain control of the House of Representatives -- and possibly the Senate -- putting gridlock on the horizon. It's also despite the fact stocks have rallied since Mr. Trump's surprise victory in 2016 (with a dramatic Election Night sell-off getting violently reversed) on hopes of less regulation, lower taxes and higher federal spending.
UBS analysts find that around the 17 midterm elections since 1950, the S&P 500 has averaged a return of 6.8 percent from the end of August to the end of the year vs. 3.4 percent for any other year. Extending the return period to the end of March, the S&P 500 has gained 14.5 percent on average vs. 6.1 percent for other years.
Just two instances were negative: 1978, when inflation hit, and in 2002, during the tech bubble burst.
There's a caveat, however. Stocks have fallen a median of 1.4 percent from the end of August through early October. So in their minds, a repeat could be in store, with the prospect of Mr. Trump enacting additional tariffs against China in September.
Jeff Hirsch of the Trader's Almanac backs this up. He noted that since 1950, September has been the worst-performing month of the year for U.S. equities. In midterm years, average losses widen for the month, totaling 1 percent for the Dow Jones industrials and 0.4 percent for the S&P 500.
But what about the risk of impeachment? Stocks weakened last week after two former Trump associates were hit with legal troubles related to the ongoing Special Council investigation led by Robert Mueller. A Democrat-controlled House could well bring forward articles of impeachment. UBS noted that while stocks fell before President Richard Nixon's resignation (because of inflation/recession fears), they rallied during President Bill Clinton's impeachment (on economic strength).
In their words, "the economy is more important for equities than politics, with the tax plan still providing a big boost."
Goldman Sachs analysts admit that continued Republican control of Congress would result in more expansionary fiscal stimulus (mainly, in the form of additional tax cuts), but they see little difference between Republican and Democrat control in terms of government spending plans.