Mid-term Elections
U.S. elections are different from other democracies regarding rules and customs. Mid-term elections occur every four years, coinciding with the halfway or the second year of a U.S. president’s term.
It encompasses election contests from congressional seats to local mayoral races, county legislature, and county sheriffs. The most important of these contests are the high-profile contests to decide the lower chambers of the House of Representatives and the upper chambers of the Senate.
2022 is another critical Mid-term election year, as the outcome will help decide who will control Congress. Currently, the Republicans and the Democrats split evenly in the Senate between 50 Republican senators and 48 Democrats/2 Independents. The party breakdown for the House of Representatives favors the Democrats, but only by a slim lead of 222 Democrats to 212 Republicans.
Mid-term Elections offer voters a chance to weigh in on President Biden’s performance during his two years in office. If voters are unhappy with the president and his policies, there may be a shift in the balance of power.
Crucial races to decide which party will control the two chambers can impact Main Street and Wall Street. State and local races typically go unnoticed. But the races for governors, big-city Mayors, and local lawmakers serve as a litmus test of the policies in place. With the thin margins the Democrats hold in both the House and Senate, there may soon be a shift in power after the Mid-terms elections.
Will a shift from the Democrats to the Republicans lead to another 4-year mid-term election year bottom and the start of the next stock market bull rally?
The Incumbent’s Party tends to lose seats during Mid-term Elections
Mid-term election trends over the past 88 years suggest the Incumbent’s President’s Party can lose an average of thirty (30) seats in the House of Representatives and four (4) seats in the Senate. If this trend repeats in the upcoming mid-term election, it is reasonable the incumbent’s party (Democrats) will lose control of both the House and the Senate.
Pollsters believe the reason for the change in power is the party currently not in power (Republicans) is more motivated to regain control, leading to higher voter turnouts in the next mid-term election. Others cite the president’s approval rating typically declines during the first two years in office. However, if the approval rating falls precipitously, swing voters will turn to candidates from the opposite party.
Elevated Market Volatility and Muted Stock Market Returns
Since the U.S. stock market retains a long-term upward bias, the results of the mid-term election are not likely to impact the prevailing structural trend. However, election uncertainties coupled with the Russia-Ukraine debacle, rising inflation, supply bottlenecks, Fed’s tightening policies, Covid-19, and recession fears can lead to elevated market volatility during the second half.
Historical trends also reaffirm voters and investors are skittish during Mid-term elections. According to the 2022 Stock Trader’s Almanac study, it shows that starting in 1946 investors are cautious during the second year of a president’s term. SPX has averaged gains of 6% during Mid-term elections or 200 basis points below the long-term SPX average annual returns of 8%.
The mid-term election stock market returns also tend to be challenging when a Democratic president is in control, averaging 4% for the entire year. During the first year of a Democratic president’s term, SPX losses -0.6% of its value, and during the second year, SPX falls on the average of around -2.3%. All four scenarios (all years, Mid-term elections, first term, and the second year of a new Democratic President) show stocks peak around April and achieve a low between May and October.
Will another important 4-year mid-term election year bottom develop into the second half?
Mid-term Election Year Cycle – 4-year Stock Market Bottoms and Recoveries
Another study by Stock Trader’s Almanac provides further insights into the mid-term election years (second year) and the Pre-election years (third year).
Stock market corrections tend to develop during the first or the second year of a 4-year U.S. presidential term. For instance, since 1961, nine (9) of the seventeen (17) bear markets bottoms occurred during the Midterm election year.
Since 1914, the Dow Jones Industrial Average recorded high frequencies of mid-term election year bottoms during two specific months. Six (6) bottoms occurred during January (1918, 1922, 1950, 1954, 1986, and 2006), and four (4) bottoms developed during October (1946, 1966, 1990, and 2002).
The year before a presidential election (year 3) also witnessed stock market highs. Nine (9) occurrences of stock market highs developed during December (1915, 1927, 1955, 1959, 1963, 1991, 1995, 1999, 2003).
On another note, the percentage change in the Dow Jones Industrial Average from the mid-term election year low to the Pre-election year high averaged gains of 47.4%.
Where is the next mid-term election bottom?
Violations of the January and February 2022 lows are technically significant for popular stock market indexes such as the S&P 500 Index (SPX) as this action confirmed a lower-low pattern and signaled the start of a cyclical bear decline. Based on the overwhelming number of previous mid-term election lows developing during January and October, it is reasonable to expect the next mid-term election year bottom to occur between now and October 2022.
Enclosed are key supports where market indexes may achieve their respective mid-term election year bottoms:
SPX: 3,200-3,500 (50%-61.8% Fibonacci retracements 3/20-1/22 rally and Aug 2020 V-breakout)
INDU: 27,600-29,600 (50% retracement from 3/20-1/22 rally and Nov 2020 V-breakout)
NYA: 13,000-14,100 (50% retracement from 3/20-1/22 rally and Dec 2020 V-breakout)
COMPQ: 9,800-10,300 (61.8% retracement from 3/20-11/21 rally and Jun 2020 V-breakout)
NDX: 9,700-10,600 (61.8% retracement from 3/20-11/21 rally and Jun 2020 V-breakout)
MID: 2,050-2,100 (50% retracement from 3/20-11/21 rally and Nov 2020 V-breakout)
SML: 1,025-1,050 (50% retracement from 3/20-11/21 rally and Nov 2020 V-breakout)
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