Despite current market volatility near record highs, historical data suggests that the upcoming midterm elections may facilitate a rally for the S&P 500 index (^GSPC) leading into the end of the year. Financial analysts are noting that the current timing places the market in a historically robust seasonal period.
Midterm Election Cycle Performance
According to research from Deutsche Bank, the S&P 500 has demonstrated a strong pattern during midterm election cycles. The firm noted that the benchmark index has increased in 21 of the last 23 midterm election cycles, specifically within the three-month window spanning from one month before the election to two months after.
Jim Reid, a strategist at Deutsche Bank, pointed out that the median return for the index during this three-month period surrounding the midterms stands at 7%. He added that as the midterms approached (less than a month away at the time of reporting), the market entered what the bank viewed as a favorable period.
Bullish Factors and Historical Precedents
The analysis also highlighted that, similar to the current year’s performance, markets had remained relatively flat between mid-July and early October. Furthermore, a significant positive factor supporting a potential rally is the expected earnings growth. S&P 500 earnings are currently projected to increase by roughly 30% year over year.
Reid suggested that this strong earnings expectation would provide a “useful tailwind for the usual midterm seasonal pattern to reassert itself, even after the recent rates sell-off.”
Notable Exceptions to the Trend
While the historical trend is bullish, analysts cautioned that past exceptions exist. Two instances where the pattern did not hold included 1978, when equities declined around the midterms due to rising inflation and interest rates, and 2018, which saw a sell-off during the first presidency of Donald Trump. That 2018 downturn was also connected to rate concerns and worries over the US-China trade war.
The recovery following these negative periods was noted; for instance, markets rebounded in January 2019 following a more dovish stance from the Federal Reserve. However, Reid pointed out that neither of those exceptional years featured the kind of substantial blockbuster earnings season that is expected for the S&P 500 now.
