In a recent Wall Street Journal article, Mark Hulbert (founder of Hulbert Financial Digest) writes, “The stock market is likely to struggle between now and the Nov. 6 midterm elections,” but not due to partisan politics.
This is because, he claims, “investors hate uncertainty, and these elections create a healthy dose of just that.” But Hulbert says the silver lining for investors is that the market “should perform especially well in the six months following the elections, regardless of the outcome. That’s because, no matter the results, this pre-election uncertainty will at least be resolved.”
Hulbert cites findings of a recent study conducted by professors Terry Marsh (also CEO of risk-management firm Quantal International), and Kam Fong Chan of the University of Queensland in Australia. The study found that, since the creation of the Dow Jones Industrial Average in the late 1890s, the index has shown an annualized gain of 1.4% in the six months leading up to midterm elections, but an average 21.8% annualized return in the six months after.
The researchers partially base their findings on an economic-policy uncertainty index (constructed by another team of researchers using article searches in key newspapers dating as far back as 1900) that measures how much uncertainty is tied to politics. The index, says Marsh and Chan, tends to rise significantly before midterms and fall just as much in the six months following them, and that “higher uncertainty correlates with lower stock returns and vice versa.” Interestingly, the data shows, the increases and dips are not as severe before and after a presidential election.
According to Marsh, writes Hulbert, “It’s entirely rational for investors as a group to pay less for stocks as uncertainty increases and vice versa.”