Midterm elections are just a few months away, prompting many investors to explore the often-asked questions: how do political outcomes affect the stock market? Is it worth making any adjustments to your portfolio?
We can look to past midterm elections for what may lie ahead for the markets and your investment portfolio.
Why Do Midterms Affect the Market?
1. Less Legislating, More Campaigning
This can be a net positive for the markets, given the lowered near-term possibility of new laws affecting the markets and the business community.
2. Uncertainty Over Who Will Control Congress
This could dictate how policy is implemented moving forward – a potential net negative for markets, as the markets typically do not like uncertainty.
What Do Midterms Mean for Your Investment Portfolio?
Over the past 100 years, during the second and third quarters of a midterm election year, the Dow Jones Industrials Index has returned on average -1%.1 This could be attributed to the uncertainty of the election outcomes, as markets weigh the possibility of shifts in power and policy that could affect the business outlook.
S&P Capital Market IQ conducted a similar study measuring performance of the S&P 500 during midterm election years since 1945. They found that the S&P had an average decline of -2.5% in the second quarter and -0.3% in the third quarter.2
However, the market has repeatedly bounced back after the 2nd and 3rd quarter midterm election year ‘dips.’ Wall Street investment firm Strategas, found that one year after the “trough” caused by the 2nd and 3rd quarter market weakness, the S&P 500 was positive 100% of the time – suggesting that the weakness tied to midterms could be short-lived.2
There’s More to the Stock Market Than Just Midterm Elections
Keep in mind that there are other factors that influence the markets, and attempting to time the market on a short-term basis is difficult, if not impossible.
Instead of focusing on the stock market and midterm elections in a vacuum, remember that other factors affect the stock market such as global economic growth, corporate profits, earnings and geopolitical events. Perhaps more importantly, any investment decisions should be made with your unique financial situation and goals in mind, and not solely based on what the market could do.
Consider adding a Tactical Money Manager Strategy to Your Portfolio
Tactical money managers design strategies that aim to participate in rising markets but maintain the ability to move to cash should conditions turn negative. When successful, these may help your portfolio limit capital loss during a prolonged market downturn.
Have a Diversified Retirement Income Plan
You might not be diversified enough if dividend-paying stocks produce all of your retirement income. Interest rates today are low, limiting the effectiveness of many government bond strategies. You may consider alternative income generators like MLPs, corporate bonds, and REITs as a portion of your overall strategy.
One strategy that aims to increase portfolio income in a prudent manner by investing in alternative-income vehicles in a risk-managed framework is the Newfound Risk Managed Income strategy. Click here to request more information about this strategy.3
Speak with a Wealth Manager About Your Investment Plan
The stock market and midterm elections may not be correlated enough to influence your investment strategy, but they do provide an opportunity to review your asset allocation and retirement income plan. One of our Wealth Managers can analyze your portfolio and offer recommendations. Get started by answering a few questions here. You can also contact us at 1-800-541-7774 or Wealth@wrapmanager.com.
Sources:
3 Newfound Research LLC
Strategy descriptions listed represent a brief outline of the portfolio’s objective. There is no guarantee that any manager or product will be successful in achieving the objective described. Diversification does not guarantee profit or protect against loss in declining markets. The strategies used by the money managers listed are not suitable for all investors. This material does not represent a personalized recommendation and does not reflect individual investor’s risk and return goals nor does it serve as the receipt of, or a substitute for, personalized advice from WrapManager, Inc. or any other investment professional.
