October 8, 2018

How Will the Midterm Election Affect Stocks Next Year?

On November 6, 2018, voters will elect candidates to fill 33 seats in the U.S. Senate and 435 seats in the U.S. House of Representatives.

While there’s no way to know for sure how stocks will react to the midterm election, a review of history reveals an interesting relationship between midterm Senate gains or losses by the then-current President’s party and the subsequent year’s stock market return.

Since 1934, U.S. stocks have generally performed better in the year following a midterm election in which the sitting President’s party retains or gains Senate seats. For example, in the 1962 election, John F. Kennedy’s Democratic party gained three Senate seats and stocks rose by 22.7% in the following year.

Similarly, a major loss of Senate seats by the President’s party has historically been followed by poor stock performance more often than not. An example of that would be in the 1938 election when the Democrats, led by Franklin Delano Roosevelt, lost six Senate seats and the stock market had a -0.4% return in 1939.

There have been plenty of exceptions to this trend, however. For example, in 1958, Dwight D. Eisenhower’s Republican party lost 13 seats, yet stocks rose 12.0% during the following year.

Seats Gained/Lost by the President’s Party in Midterm Elections

Year President House Seats Senate Seats Next Calendar Year’s Stock Return
1934 Franklin D. Roosevelt 9 9 47.7%
1938 Franklin D. Roosevelt -71 -6 -0.4%
1942 Franklin D. Roosevelt -55 -9 25.9%
1946 Harry S. Truman -45 -12 5.7%
1950 Harry S. Truman -29 -6 24.0%
1954 Dwight D. Eisenhower -18 -1 31.6%
1958 Dwight D. Eisenhower -48 -13 12.0%
1962 John F. Kennedy -4 3 22.8%
1966 Lyndon B. Johnson -47 -4 24.0%
1970 Richard M. Nixon -12 2 14.3%
1974 Gerald R. Ford (Nixon) -48 -5 37.2%
1978 James Carter -15 -3 18.4%
1982 Ronald Reagan -26 1 22.5%
1986 Ronald Reagan -5 -8 5.2%
1990 George H.W. Bush -8 -1 30.5%
1994 William J. Clinton -52 -8 37.4%
1998 William J. Clinton 5 0 21.0%
2002 George W. Bush 8 2 28.7%
2006 George W. Bush -30 -6 5.5%
2010 Barack Obama -63 -6 2.1%
2014 Barack Obama -13 -9 1.4%
2018 Donald J. Trump

 

Overall, we’ve seen a 0.55 historical correlation between Senate seats won/lost by the President’s party and the following year’s stock market return. Similarly, we’ve seen a 0.30 historical correlation between seats won/lost in the House of Representatives.

With the 2018 election still a month away, pollsters are projecting that Democrats will likely gain a number of Congressional seats and possibly win control of the House of Representatives. The outlook for the Senate, however, remains highly uncertain, giving political pundits and investors alike plenty to think about.