This article was first published on the Humble Dollar
Midterm elections are less than two months away. The political landscape is uncertain and always fraught with heated opinions—but I won’t dive into that end of the pool. Instead, consider how the stock market might perform in the coming months and into 2023.
While technical analysis—using past price data to infer future prices—is controversial and dismissed by many fundamental investors, it’s hard to ignore a persistent bullish pattern that could soon repeat. Stock market history tells us that, during midterm election years, the has—on average—bottomed in late September or early October. Big gains then occur through the first half of the following year, the so-called pre-election year.
Is this just a random walk, not a reliable phenomenon? Maybe so. I’m not betting my IRA on the pattern repeating itself in the months ahead. But I’m also cognizant that markets go through trends. I encourage readers interested in the topic to read what Ryan Detrick has to say in his in-depth look at market history.
While technical analysis suggests the market will fare well in the months ahead, there are also some fundamental drivers that tend to spur the stock market higher around the midterm elections and ahead of a presidential election year. Consider that the incumbent party often seeks to stimulate the economy so folks feel better about their financial situation. Sound familiar? With recent bills like the Inflation Reduction Act and the CHIPS and Science Act, more money is being flung into the economy. On top of that, let’s not forget the massive student loan forgiveness plan.
Something else to weigh: It’s often said that the stock market hates uncertainty. Perhaps investors buy up shares as they anticipate an end to the midterm election drama. Voters then head to the polls, a new Congress is put to work, life moves on, and the stock market rallies as the feared political turmoil fails to materialize.
Is there something to the election cycle pattern? Perhaps, perhaps not. But for investors who have been unnerved by this year’s stock market volatility, this might be another reason to continue hanging tough.
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