How The Midterms Will Affect The Stock Market (And Your Wallet)

When political shifts occur, it’s natural to wonder what will happen in the wake of change. Here we’ll discuss how the midterm election could affect the stock market, and how it may impact you as well.

Americans are waking up to a new stage in the political cycle; Republicans kept the Senate, but Democrats retook the House. Gone is Republican control of all branches of federal government – now could be the time for gridlock, as for the first time in two years both parties have fighting power.

Are the midterm elections good or bad for your wallet? Let’s find out what you can expect.

What’s Happened in the Past

While the stock market’s past performance does not necessarily indicate future potential, we can dig through the historical data on how stocks have performed around and after midterm elections for clues about the future.

Midterm Election Boost: To start, the fourth quarter of the midterm election year and the first two quarters of the following year (so, October 2018 through June 2019 in this case) have, historically, been the best-performing nine months in the four-year presidential cycle, according to LPL Financial.

House Flip Drags The Market: To take this a little further, CNBC cited data showing that when the House majority flipped from one party to another since 1896, the median stock market gain was 1.9% twelve months after the election. Put another way, when the House flips its controlling party, the stock market historically hasn’t done that well.

They found, though, that when the House majority stayed with the same party after the midterm elections, the median return was 16.8% twelve months after the election. So, historically speaking, when the same party stays in place, the stock market crushes it.

With the Democrats taking control of the House, historical data indicate that there could be a drag phenomenon on the markets in the near future.

What Do the Experts Think Will Happen?

With the Democrats taking control of the House, as was expected, we can expect to see important political ramifications which will bleed into the economic realm. The first big thing we expect is fewer legislative changes. With Democrats controlling the House, it may be more difficult for laws to pass, which would create a sense of certainty and stability in the markets. Things like tax cuts may be slowed (but likely not reversed), and the whole concept of the trade war could be stalled–creating possible benefits for global (and emerging) markets.

A “Democrat-controlled House would stand in the way of further escalation of the trade war, and potentially reverse some of the previous measures,” said Richard Bowman of FX Empire. “The knee-jerk reaction will probably be lower stock prices as further tax cuts would no longer be on the table. If an initial shock doesn’t have a knock on effects, markets will then look at the longer-term implications including the global economy and the trade war.”

While this is all speculation, it’s highly likely some of these things would occur in Washington, which would then have a ripple effect on the stock market. Historical data tells us that we shouldn’t see a market crash, but growth may be slower than previous midterms where there was a stronger sense of certainty.

How to Make Your Portfolio “Politics-Proof”

If all this talk of the stock market being impacted by politics has you concerned, you’re not alone. While we can cast our votes, the market implications are largely out of our control. That’s why you should be proactive about making your portfolio a little more “politics-proof” by following these steps:

1. Diversify

Diversifying your portfolio is one of the most important things you can do as an investor – whether you’re experienced or not. If you like to pick individual stocks, make sure you’re diversified across industries, and be sure to include companies that have footprint and exposure to international markets. If you’re more of an ETF, mutual fund, or index fund person, pick funds that give you exposure across the entire world in a variety of industries. The more mixed your portfolio is, the less of an impact things like midterm elections will have on you.

2. Rebalance

If we do see a major market impact from the elections, it could throw your portfolio out of whack. Pick a target asset allocation and do your best to stick to that as often as possible. For example, if you want to have 70% U.S. stocks, 20% foreign stocks, and 10% in bonds, you’ll need to rebalance your portfolio (I recommend about two times per year) to make sure those percentages stay intact. As your stocks gain and lose value, the percentages will become skewed.

3. Don’t react to market news

Unless you’re a day trader, sitting behind three screens and trading stocks at a moment’s notice, in nearly every case you have no reason to react to the news or things like elections. I value a long-term investment strategy, and you should too. If the midterm elections tank the stock market, historical data tell us it will bounce back. If stock skyrocket in value, that same data tells us the market will eventually come back down to earth. The point is, don’t react immediately on news you’re hearing from the election–let it play out and stick to your normal investment patterns. Otherwise, you’ll drive yourself, and your portfolio, crazy.

4. Use a roboadvisor

The first three points are assuming you’re manually investing in stocks, bonds, and other funds. You can solve all of this by using a roboadvisor like Betterment or Wealthfront. Roboadvisors will not only diversify your portfolio for you, but they’ll also automatically rebalance it and stick to an algorithm in how your money is managed–so it won’t be reactive to the news. You can also set up auto-deposits to make sure you have money going into the market at all times, regardless of who takes the House.

Conclusion

I’d love to sit here and tell you exactly what’s going to happen to the market based on the midterm election results. But I can’t. Nobody can.

So while we can hope for (and even assume) that the markets will rally toward the end of the year and early into next year, for now, we’re all in a wait-and-see mode.

Don’t panic, don’t react, just keep your focus on the long-run and continue to invest in a diversified, well-balanced portfolio.

Topics: Financial News • Investing

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