In just a couple of months the country will vote in the mid-term elections. This is the election that falls between presidential elections. On the Federal level, all seats in the US House of Representatives are up for election every two years and a third of US senate seats as well. There is a tendency for the party that did well in the presidential election to lose seats in this “off year” election. Because of the potential for a significant shift in political power on the Federal level, investors are wise to pay attention. Could the mid-term elections cause you to lose money? Here are some thoughts on the subject.
The Effect of Mid-Term Elections on Stocks
Zacks Investment Management has some useful things to say about how mid-term elections affect stocks.
Because midterm election years can mean a shift in the balance of power in Congress, it also means that there is an increased risk of one party enacting new laws and/or policies in the lead-up or once the power dynamic is set. Markets, in our view, do not like policy uncertainty.
This thought is supported by the figures they quote.
Going back to 1962, the average correction during a midterm election year was an eyebrow raising -19%.
Since 1962, the average bounce for stocks following the midterm correction was a sturdy +31%.
Their approach to politics is that they are only interested to the extent that what the government does has an effect on investing by way of “property rights, corporate profits, and economic growth.”
If you believe these folks, you could lose money going into the mid-term election and win even more back afterwards.
Many Factors Affect Your Investments
How well your investments do depends on how well you pick them. We have repeatedly mentioned the concept of intrinsic value to use as a guide for long term investing in stocks, although the concept applies to any investment. In order to accurately determine intrinsic value of an investment, you need to be able to predict the future. That works better with a stable economy, no extreme changes in the laws affecting investments, and no major crisis that throws everything into an uproar. Volatility in any factor makes investors nervous and tends to drive down stock prices. This is why the market tends to sag in the months coming up to the mid-term elections.
How about This Year?
Could the mid-term elections cause you to lose money this year more so than in other mid-term election years? The factors that concern us all revolve around the investigation into Russian meddling in the 2016 presidential election. And, could things get worse instead of better after the election?
The main cause of low stock prices going into the mid-terms is uncertainty. And, when the election is past, the uncertainty goes away. Thus, stock prices fall and then they rise. But, what happens this year if the Democrats reclaim both the US House of Representatives and the US Senate? And, what happens if the investigation into Russian meddling in US elections finally implicates the sitting US President? Clinton was impeached in the 1990s when the Republicans controlled the House of Representatives but the Democrats controlled the US Senate and Clinton remained in office. Nixon was likely be impeached by the House and convicted by the US Senate and agreed to resign.
Our take on Donald Trump is that he would never give up even if there were damming evidence of his complicity in Russian meddling or in orchestrating a cover up. The worst near-term case scenario for investors is that the Democrats take back the House and Senate. Then the House votes to impeach Donald Trump. The national anguish from such a drama played out on the talk show and news, repeated presidential tweets, and a high stakes game of chicken between the President and Congress would continue the uncertainty that investors hate and drive stocks down even further. Pay attention as this drama plays out and maybe consider looking at our article about how to invest without losing any money. For investors who like certainty, the potential upside to the worst case scenario is that Trump leaves office, the Tweet storms cease, we have a “ho hum” president in Pence, and four years of relative tranquility in Washington allow investors to plan, invest, and make profits.