The elections coming in November are important for two reasons.
The first reason is that voters can have their say in the where they want the country to go and how they want the county to be run. That is why the framers of the Constitution scheduled elections every two years. As a Vietnam Veteran (US Navy) I spent a year on the rivers of Vietnam trying to bring the right to vote to the citizens of that country. Among the highest compliments you can pay a veteran is to vote. Every other November, voting is part of the requirements in all my classes. If we don’t demonstrate the importance of voting, who else will?
The second reason is stock market performance. Writing in The Wall Street Journal on May 7, 2018, financial columnist Mark Hulbert observed that the stock market may be a struggle between now and the November 6th midterm elections. Hulbert believes the reason is that investors hate uncertainty and the November 2018 elections are definitely full of uncertainty. Switch between CNN and MSNBC on the one hand and Fox News on the other hand, and you might wonder if the commentators are talking about the same country.
Hubert is reporting on a recent study by Terry March, an emeritus finance professor at the University of California Berkeley and the chief executive officer of Quantel International, a risk management firm for institutional investors, and Kam Fong Chan, a senior lecturer in finance at the University of Queensland in Australia.
The researchers found that ever since the Dow Jones Industrial Average was created in the late 1890’s, it has produced an annualized gain of just 1.4% in the six months before mid-term elections (May through October) in contrast to a 21.8% annualized return in the six months thereafter (November through April).
Moreover, the midterm pattern can’t be explained by the conventional wisdom about how the November-through-April period is generally better for investors than the May-through-October period. In fact, the researchers found that the six month down-and-up cycles hold true only in midterm election years.
The researchers based their findings on an uncertainty index which measured the frequency with which the words “uncertain” or “uncertainty” were coupled with the words “economic”, “economy”, “business”, “commerce” or “industrial” and one or more of the following terms: “Congress”, legislation”, “White House”, regulation”, “Federal Reserve”, “deficit”, “tariff”” or “war” in six key newspapers. The more often the word combinations appeared, the higher the uncertainty index.
Professors Marsh and Chan found that this uncertainty index tended to rise significantly in the six months before midterm elections and then fall just as much in the six months thereafter, and that higher uncertainty correlate with lower stock returns. The professors believe that the result is entirely rational for investors as a group to pay less for stocks as uncertainty increases. In other words, when investors perceive more risk than usual, they tend to stay out of the stock market and that lack of buying interest drags prices down.
The professors also found that the ups and downs were not as pronounced in the period before and after presidential elections as they were for midterm elections. The only statistically significant pattern related to a presidential cycle is the one before and after the midterm election. They found that the conventional wisdom that the fourth year of a presidential cycle should be the strongest because the sitting president is, in theory, pulling out all the stops to boost the economy for his reelection or his successor’s election is actually no better than the average of all the years. They had no explanation for the apparent inconsistency, if in fact there is an inconsistency. It may be in reality that the president’s economic policies are designed for all four years and not just to be reelected so the fourth year postulate is just a market commentator’s “wisdom” without any factual basis like the daily explanations of stock market movements by market commentators on virtually any medium.
So I went downstairs and read the professor’s findings to Riley, the Golden Retriever dog who used to share my office. (My office is on the second floor. Riley can go upstairs, but her diminished eyesight is causing her real problems going down the stairs.) I asked Riley what she thought. She lifted her head and looked at me with that “if there is no cookie in it, why are you bothering me” look. She then yawned and put her head back down. Riley, good advice – do nothing. Stay fully invested as over 117 years of Dow Jones data suggests that a) the stock market rises over the long term, and b) the stock market rises more after periods of uncertainty with the most consistently identifiable period of uncertainty being the time before the US midterm elections.