Approaching Midterm Elections

The 2022 midterm election is less than three months away, which means primary races are ending and campaign battles are heating up.  Currently, the Democrats hold a slim majority in Congress with five more seats than the Republicans in the House of Representatives (435 total seats) and a 50/50 split in the Senate.  All 435 seats in the House of Representatives are up for election and 35 in the Senate – 21 held by Republicans and 14 held by Democrats.

At this stage in the election cycle, the outcome can be relatively unpredictable, but history suggests midterm elections are challenging for the political party with a President in the White House.  The president’s party has lost House seats in 17 of 19 midterm elections since World War II and Senate seats in 13 of 191.  If historical statistics hold true, the implication would be a split government with Republicans leading Congress and Democrats leading the White House.

Historically, S&P 500 performance preceding midterm elections tends to be lackluster.  If we split the midterm election year into two categories: pre-election and post-election, it shows two distinct differences in returns.  The graph below2 shows the performance of the S&P 500 300 days prior to the election and 60 days post-election.  The maroon line is the average performance of the 13 midterm election years back to 1970 and the blue line is the current year.  On average, the market tends to hit its low point for the year a month prior to election before returning positive near, and after, election day. 

Looking ahead, there are three potential outcomes for the election:

  1. Republicans win either the House or Senate, but not both
  2. Republicans win both House and Senate
  3. Democrats retain both House and Senate

Furthermore, history has shown that a split Congress has been the most favorable for markets since 1944.  The chart below reflects the average annual performance of the S&P 500 under different presidential cycles3.

Midterm elections occur every four years and while it can be tempting to speculate on a unified government, unified Congress, or split Congress, these elections should not have a significant impact on your investment strategy and overall allocations.  At Gradient Investments, we will monitor political actions and understand events happening in Washington DC, but we do not base portfolio actions on potential political outcomes.  Our focus, as always, remains on the fundamentals: the health of the economy, the health and growth of companies, and the valuation of the companies in the global markets.