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There's another item to add to the investor worry list: Upcoming midterm elections

  • Midterm elections are adding yet another worry to a market struggling to stay out of correction territory.
  • The S&P 500 has declined 2.2 percent in the second quarter and 0.9 percent for the third quarter in midterm election years since World War II, the only two negative quarters in the presidential cycle, according to CFRA.
  • The RealClearPolitics average of generic party polls shows Democrats holding a 6.7-point lead over Republicans, though that has been narrowing through the year.

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On top of all the other obstacles thrust on investors for 2018 comes one that has been a burden for decades: the upcoming midterm elections that will determine the direction of Congress.

The races for the House and Senate as well as state governorships and legislatures have been a headache for the market going back to World War II.

In the period since, the S&P 500 has declined 2.2 percent in the second quarter and 0.9 percent for the third quarter in midterm election years. Those are the only two negative periods in the presidential cycle, according to Sam Stovall, chief investment strategist at CFRA.

"During mid-term election years, one word tends to describe investors' mindset and the driving force behind share-price performances: uncertainty," Stovall said in a research note. "It is therefore not surprising to see that the two quarters leading up to the mid-term elections have been the most challenging of the entire 16-quarter presidential cycle."

The news gets worse when going farther down in company size: Small-cap stocks have lost an average 2.5 percent and 6.7 percent, respectively, in the two quarters leading up to the general election since 1979.

Those historical obstacles come at a time when the market is having a hard time gaining ground, with politics serving as a particularly disruptive force. Major averages have twice been in correction territory this year — once during an early February inflation scare and now as investors fret over not only a sharp decline in major tech names but also a potential trade war.

At stake in the national midterms is President Donald Trump's economic agenda.

Trump's Republican Party currently controls both houses of Congress, but national polls indicate that Democrats could make inroads. The RealClearPolitics average of generic party polls shows Democrats holding a 6.7-point lead, though the gap has been narrowing through most of 2018. Democrats held a 12.9-point advantage at the end of 2017.

Stovall advises investors to keep a watch for likely volatility as the political drama unfolds.

"Even though there is no guarantee that the large- and small-cap benchmarks will post similar performances this year, investors would be wise to heed prior performances either by taking advantage of such volatility or by simply riding out the expected emotion-elevating churning in the months ahead," he wrote.

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