Two the Point — Midterm Elections and the Markets – Some Hope for 2023?

We are quickly approaching the November midterm elections.  Leaving politics aside (as all good investors should), let’s look at historical stock market behavior during and immediately following a midterm election year.  The takeaways are encouraging:

1.       Midterm election years are historically the most volatile of the 4-year presidential cycle with an average intra-year decline of 19%.  This is far greater than the 12-13% declines seen in years 1, 3, and 4.
2.       This increase in volatility has typically been an opportunity for investors.  The year following the midterm elections (year 3 of the presidential cycle) has seen the best performance with an average gain of 31.6%.

2022 has certainly been consistent with prior midterm election years with the S&P 500 down about 19% as of September 21.  The question now is whether 2023 will follow the historical pattern of better-than-average performance.

At Bryn Mawr Trust, we have been quite cautious about the stock market for most of this year.  Our view has largely been driven by the notion that leading economic indicators would continue to deteriorate, and corporate earnings growth would follow.  For now, we are still of that view as we head into 2023.
However, many variables we track show the potential for economic stabilization as we push further into next year.  The combination of stabilizing economic fundamentals, an improving earnings outlook, falling inflation, and a less aggressive Federal Reserve has the potential to drive a meaningful recovery in financial assets in the back half of 2023.  So, even amid the many challenges we are dealing with today, 2023 has the potential to be another solid post-midterm year for the stock market.
S&P 500 Corrections & 1 Year Performance following correction by presidential cycle (1962-2021)
Source: Strategic Research Partners