Market Extra: A breakdown of how the market performs after midterm elections

NEW YORK (MarketWatch) — As you may already know, Republicans have a lot of momentum going into Tuesday’s midterm elections. But what you may not know is how the market performs in the wake of these hard-fought midterm election battles, which are held at the midpoint of a president’s four-year term.

Perhaps surprisingly, the midterm elections have proved to be a vote for the market. Regardless of which party comes out on top, after ballots are cast, the market historically has fared exceedingly well, ringing up positive returns. However, there are a number of ways to parse the data. Here’s what you need to know as voters head for the polls on Tuesday.

Equities tend to rally

Stocks already enjoy a seasonal tailwind that has traditionally lifted stock returns in autumn. Since the end of World War II, the Oct. 31 to April 30 period has proved to be the strongest period for stocks, with an average 7.1% gain for the S&P 500 SPX, -0.06% according to data compiled by Bank of Montreal. See: Stocks get a seasonal tailwind this time of year.

But midterm election years tend to see that performance get an extra boost, with stocks returning 16.3% over the same stretch, according to Bank of Montreal chief equity strategist Brian Belski. Analysts at Credit Suisse found that in the 21 midterm election years since 1930, the S&P 500 has seen an average return of 7.4%, in the 100 days after a general election day, while returning nearly 17.8% on average in the subsequent calendar year after midterm elections.

Democratic president, Republican Congress is top performer

The key political question is whether Republicans will manage to take control of the Senate from the Democrats. It’s virtually certain the GOP will retain control of the House.

Sam Stovall, U.S. equity strategist at S&P Capital IQ, notes that the combination of a Democratic president and a unified Republican Congress has been accompanied by the best average performance for the S&P 500 since 1945 and the second best since 1901 (see chart above).

Don’t forget a grain of salt

Dan Greenhaus, chief strategist at BTIG, notes that he has been peppered with questions from clients over how stocks perform in the wake of midterms, particularly when one party loses control. While the short answer is that stocks generally do fine, he notes that this is “almost always the case in any data mining exercise that looks at stock prices through the end of the year.”

That said, a quick look at the table would probably lead an observer to characterize the performance as “’mixed’ and we wouldn’t disagree,” Greenhaus wrote. That makes it no surprise that analysts like to look further out, he said, noting that, indeed, through April, stocks tend to outperform the usual seasonal gain.

However it is sliced, BTIG thinks the bias for stock prices is higher into the end of the year, Greenhaus said, with the firm maintaining the same position its held through the recent market turbulence. – Top Stories

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