The election could be a big tailwind for stocks heading into the end of the year

Published Mon, Nov 7 20228:04 AM EST

On an historical basis, "the Sweet Spot of the 4-year cycle is now," stock market historian Jeff Hirsch from the Stock Trader's Almanac said in a recent note to clients. It's a well-studied phenomenon: The S & P 500 has tended to underperform in the year leading up to midterm elections, and outperformed in the year after midterms, especially in the period immediately after the election. The average annual return of the S & P 500 in the 12 months before a midterm election since 1962 is 0.3%, "significantly lower than the historical average of 8.1%," US Bancorp said in a recent note. That switches after the election. In the 12-month period after a midterm election, the S & P is up an average of 16.3%. The outperformance was especially notable in the period three months and six months after the election, when the S & P was up 7.3% and 15.1% on average. Most attribute the reason for underperformance to policy uncertainty — investors do not know which political party will hold a majority in Congress, which resolves after the midterm election. "The prospects of the end of the uncertainty are like the light at the end of the tunnel," Hirsch said in an email to me over the weekend. The potential for Republican control of the House of Representatives and maybe the Senate is sending signals that at the very least higher taxes and more spending are unlikely. "To the extent that 2022 turns out to be a wave election for Republicans, the bigger the wave, the more impactful we think it will be for US equities in the short term and into next year," RBC Capital said in a note to clients over the weekend. Hirsch also noted that the post-election rally was broad-based: Three months after the midterm election, the Dow, S & P 500 and Nasdaq were all higher on average from 6.4% to 9.2%, going back to 1950. The S & P was higher 88.9% of the time. Regardless, strong seasonals are not enough to overcome the macro backdrop of aggressive central banks and the prospect of a worldwide economic slowdown. "We see no compelling reason to add risk despite the possibility of a bit more year-end upside," Tony Dwyer from Canaccord Genuity said in a note to clients. Strong seasonals aren't enough to get Morgan Stanley's Mike Wilson to change his bearish tone either: "We remain fundamentally bearish with leading indicators showing further deterioration," he said.