Updated: Feb 6
U.S. elections are somewhat different from many other democracies regarding rules and customs. The Mid-term elections occur every four years, coinciding with the halfway or the second year of a U.S. president’s term.
It encompasses numerous 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 chamber 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 are split evenly within the Senate between 50 Republican senators and 48 Democrats/2 Independents. The party breakdown for the House of Representatives currently favors the Democrats, but only by a slim lead of 222 Democrats to 212 Republicans.
Mid-term Elections will offer voters a chance to weigh in on President Biden’s performance during his first year in office. If voters are unhappy with the president and his policies, there may be a shift in the balance of power.
There are many crucial races taking place within Congress this year. Many state and local races typically go unnoticed. But races regarding Governors, big-city Mayors, and elections of local lawmakers can sometimes serve as a litmus test to the various policies currently in place or will be passed. With the thin margins the Democrats hold over the Republicans in both the House and Senate, there may soon be a shift in power after the Mid-terms elections.
The Incumbent’s Party tend 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 30 seats in the House of Representatives and four seats in the Senate. The incumbent’s party (Democrats) rarely gained seats in both chambers during Mid-term elections. Some pollsters believe the party currently not in power is more motivated to regain control, leading to higher voter turnout. Others cite the president’s approval rating typically declines during the first two years in office, resulting in swing voters seeking a change by voting for candidates in the opposite party.
Elevated Market Volatility and Muted Stock Market Returns
Since U.S. stock markets have a long-term upward bias, the dominant and prevailing structural bullish uptrend will likely continue. However, election uncertainties, coupled with the congressional stalemates, rising inflation, hawkish Fed, Covid-19 Omicron variant, China’s tech crackdown, and geopolitical turmoil in Ukraine, can translate to elevated market volatility. Historical trends also show voters and investors tend to be cautious during Mid-term elections.
According to the 2022 Stock Trader’s Almanac, this does not paint a pretty picture for stocks this year. The study further shows that since 1946, SPX has averaged gains of about 6% during Mid-term elections or slightly less than the historical long-term SPX annual returns of 8% in all years. However, the returns are more challenging when a Democratic president is in control during Mid-term elections, averaging about 4% for the year. It is worse during the first term midterm years, as it averages an SPX loss of -0.6%, and during the 2nd year of new Democrats presidents, SPX falls on the average of around -2.3%. All four scenarios (all years, Mid-term elections, first-term Mid-term elections, and the second year of a new Democratic President) show that stocks tend to peak around April and decline toward a bottom between May and October.
Mid-term Election Year Cycle Stock Market Bottoms and Recoveries
Another study by Stock Trader’s Almanac shows the Mid-term Election Years (second-year of a U.S. Presidential Election year cycle) and Pre-election years (third-year) tend to occur within a specific timeframe. Historically, stock market corrections tend to develop during the first or the second years of a 4-year U.S. presidential term. For instance, since 1961, 9 of the 17 bear markets bottoms occurred during the Midterm election years. Also, since 1914, six (6) January (1918, 1922, 1950, 1954, 1986, and 2006 and four (4) October (1946, 1966, 1990, and 2002) Dow Jones Industrial Average recorded Mid-term election year cycle bottoms. Nine (9) December (1915, 1927, 1955, 1959, 1963, 1991, 1995, 1999, 2003) INDU recorded Pre-Election Year highs. On a positive note, the percentage change between the Dow Jones Industrial Average Mid-term Election year low to the Pre-election year high averaged 47.4%.
January 2022 Reaction Lows and Mid-term Election Cycle Bottoms?
Attached below are the January 2022 lows for the S&P 500 Index (SPX), Dow Jones Industrial Average (INDU), NYSE Composite Index (NYA), Nasdaq Composite Index (COMPQ), Nasdaq 100 Index (NDX), S&P 400 Mid-cap Index (MID), and S&P 600 Small-cap Index (SML). Violations of these reaction lows can lead to the Mid-term elections stock market bottoms and the next major bull market rally. One final technical observation - the ability of major market indexes to maintain support above the respective 1/24/22 lows also hint of potential market lows, albeit further technical works (i.e., technical bases) are needed to confirm the market bottoms.
Enclosed below are the critical January 2022 lows for popular indexes and the implications of violating these lows:
SPX: monthly low = 4,222.62 (1/24/22) – Violation of 4,222.62 suggests 3,600-3,800
INDU: monthly low = 33,150.33 (1/24/22) – Violation of 33,150.33 suggests 29,350-29,800
NYA: monthly low = 33,150.33 (1/24/22) – Violation of 33,150.33 suggests 14,100-14,200
COMPQ: monthly low = 13,094.65 (1/24/22) – Violation of 13,094.65 suggests 12,100-12,550
NDX: monthly low = 13,724.85 (1/24/22) – Violation of 13,724.85 suggests 12,000-12,950
MID: monthly low = 2,519.16 (1/27/22) – Violation of 2,519.16 suggests 2,100-2,250
SML: monthly low = 1,246.65 (1/27/22) – Violation of 1,246,65 suggests 1,025-1,135