The Dow Jones Industrial Average and other indexes are taking a beating in 2022. Major stocks such as Apple, Microsoft and Tesla have all suffered massive drawdowns. Because of this many investors are surely worried about the effect of the midterm elections.
But studies show that while market volatility spikes leading up to elections, the period following the voting often rewards investors with rich returns. Since 1950, the average one-year return following a midterm election was about 15% on the S&P 500.
David Ryan, a three-time winner of the U.S. Investing Championship, told Investor's Business Daily there are plenty of reasons to be optimistic.
"We're down this year going into the midterms, but this is one thing that could help the market," Ryan said. "Records can always be broken, but these are some of the things you should be aware of and be looking out for in the future."
At the moment it looks likely that Republicans will take control of at least the House of Representatives. But a red wave where it seizes both the House and the Senate is also possible amid low approval ratings for President Joe Biden.
According to Ryan, from 1977 to 2019 the stock market's best performance came during times when control of Congress was split between Republicans and Democrats.
The second-best performance period was when Republicans controlled the Senate and Democrats the House, according to Ryan's data.
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Federated Hermes Chief Equity Market Strategist Philip Orlando also said that gridlock is good for the markets.
"While the S&P's sharp 25% correction so far this year reflects investor frustration with the state of the economy, stock prices typically rally during the fourth quarter of midterm election years if voters introduce divided government," he said in a research note.
The big risk is if Democrats somehow pull a rabbit out of the hat and manage to keep overall control.
"If the Democrats should manage to keep both houses of Congress in the midterms, and there is no change in the current direction of our fiscal policy, then there may no change in direction for stock prices either," he added.
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Stocks Have 'Good Chance' After Midterms
CFRA Chief Investment Strategist Sam Stovall found that, from a longer-term perspective, a unified government or a split Congress resulted in the best outcomes for investors.
His data found that from 1944 until 2022, united government — with one party controlling Congress and the White House — led to stock market advances 75% of the time.
The worst outcome came when a Democrat president was in charge along with a fully Republican Congress. Here stocks gained 60% of the time.
While that's the most likely scenario, Stovall believes that stocks have a good chance of making up some of their losses following the midterms.
"While I think the rising risk of recession will pressure stocks in the longer run, seasonal optimism could support or boost stocks later this year and into 2023," he told IBD.
Please follow Michael Larkin on Twitter at @IBD_MLarkin for more analysis of growth stocks.
