DID/DO YOU KNOW?
About the Mid-Term Election Year
In our Do or Did You Know? blogs we provide readers with useful information that generally is not realized by inexperienced investors. In Chapter 1 of our publication, When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon), we briefly introduce the concept of the 3rd year of the Presidential Election Cycle.
Each of the four years in the cycle has its own unique history and probability of success and/or failure in the financial markets, and today’s blog focuses on the 2nd year – also referred to as the Mid-Term Election year.
The Mid-Term Election Year is the time period, culminating in November, when voters weigh in on local elections, as well as Senate and Congress seats. It essentially serves as a halfway point “report card” on the current administration’s performance since the inauguration almost 2 years prior. Fair or unfair, as it normally takes quite some time for new policies to become fully established, and the minority party (which lost the prior presidential election) generally opposes and criticizes the current administration from Day 1. This often results in a public sentiment shift (especially from moderates or independents), toward the minority party in some key elections, which can in turn change the balance of the Senate or Congress, resulting in stalemates (known as “filibusters”) which obstructs legislation on important issues.
Without going into great details on those aspects, the mid-term period, and the lead up with ads and campaigning for months prior to the elections, can be filled with verbal attacks, deception, and volatility, that leaves investors in a state of confusion. The uncertainty (which the market despises) often causes either non-directional, choppy, markets, or even significant declines along the way.
The last mid-term election year, 2022, was very contentious, which led to a 17% decline in the S&P 500. In fact, there have been 16 consecutive Mid-Term Election years, since 1962, where the market has experienced a negative return, at an average of almost 19%. Since 20% is considered an official “correction,” the market is always vulnerable, on average, of a full year correction. The downturn is then routinely followed by a positive, or “rebound” year, which we discuss in our publication.
The 2nd year of the Presidential Cycle can be broken down into two separate categories as well, depending on the time occurrence of said correction. When an official correction begins prior to the month of September, the markets suffer an average of a 16% year-end loss, with a subsequent 23% recovery the following year. When the correction does not start until September, or after, the year-end loss averages about 9%, with a 13% bounce back. Although the statistics are different every year, and there are no guarantees, this provides a gauge depending on the timing of the large decline.
Do not panic if you are a longer-term investor. If you are more of a speculator, watch for the obvious signs of reversal and decline, keep to your system, including mental stops, and do not fall prey to any play on your emotions. Trading the extreme situations we often discuss (like the Fear & Greed Index for one) is likely the better strategy for the trading and investing novices. Investing after large downturns has also been beneficial through time.
*** This information is not intended to be financial advice, and should be considered or any specific buy or sell recommendation, but rather a guide to assist the reader in some further understanding of the financial markets.
