Midterm Election Seasonality – YES! It’s been a Real Thing | News or Noise

 

Nine Hard Months:

2022 has been a bad nine months for investors in stocks and bonds globally. While our team had expected our first market correction since the Covid bottom, Investors suffered the first broad bear market in years. Stocks roundtripped two years of gains through the end of the third quarter, which while common during Fed rate increases, is not enjoyable.

What’s the culprit? Treasury bond interest rates increasing at the fastest pace in decades during a normally weaker mid-term election year, amid slowing growth. These things have combined to crunched risk assets. In the last four weeks, the Federal reserve interest rate increase path has been so fast that it’s stressing and breaking esoteric parts of the financial markets.

Much as Alan Greenspan’s doubling of interest rates caused the Mexican currency crisis in late 1994, Chairman Powell’s race higher is causing stress in other countries and other assets beyond our shores, most notably in Britain, amongst U.K. pension funds and the British currency, the Pound.

What’s notable is that both these rapid rate hiking cycles happened in front of mid-term elections. I’m Chris Perras, chief investment officer with Oak Financial Group and this is our investment team’s mid-week release. We examine a news item, headline or story making the rounds from publicly available sources and we ask, is it news or is it noise for your money?

This week we talk about mid-term election year seasonality in the stock market. So looking back, these Fed rate increases, were both cycles that were efforts to stave off inflation. And both rate cycles look to be peaking in momentum around the same time of the year in the fourth quarter after financial markets suffered 10 to 11 months of decline.

As we’ve discussed in previous videos, mid-term election years tend to be sloppy, choppy messes for the first three quarters of the year. On average, U.S. midterm election year declines are -20%. 2022’s slightly greater than 20% decline places it in the standard declines during mid-term years. That deserves a Charlie Brown. Ugh. The average and median midterm year corrections for the SPX are 20.8% and 19.8%, respectively, according to Merrill Lynch.

But here’s the good news: Lower prices often lead to higher, longer-term returns and, quite often, large multi-month and multi-year recoveries.

Potential Recovery:

According to Stephen Suttmeier at Merrill Lynch, the month of October is the month of the year when the biggest market lows and bottoms are made, throughout history. Eight out of the 17 biggest rallies ever, started as lows in October, and 13 out of the 17 biggest rallies started in June or later. So far, year to date, mid-June and early October are looking like low water marks for the year. History would say we are in the time window for better returns. Viewers, we are not talking about 5-10% moves. We are looking at longer-term buy-and-hold moves that last 13 to 93 months and average almost four years.

The best part of the Presidential Cycle is from the midterm year low, usually in the late third quarter, through Year 3 of the cycle.

• Rallies off the low into yearend can be strong and have an average return of 17.6% (13.3% median).
• The potential for a sharp year-end rally in 2022 is aligned with the path the S&P500 has usually taken after the Federal Reserve begins a rate hiking cycle.
• A cycle in which we should be approaching peak hawkishness and peak momentum. Take a look at the historical data for those who are interested.
• Year to date, we’ve followed very similar patterns to 1962 and 1994.

Over the last 70+ years, stocks have always had positive returns one year after the mid-term elections. The average return has been almost 15%. Previously, we have discussed that stock markets tend to be largely indifferent to the results of U.S. elections. The market’s favorite outcome is a split government and the predictability that gridlock brings.

This is news for your investments. News that says historically speaking, the markets should be entering a time when there are fewer headwinds and more tailwinds, not for days or a few weeks, but months and quarters. Year three of a new President’s term, which would be 2023, has seen the best annual returns of the periods studied back to 1950, posting an average gain of 20%. No guarantees, but history does have a tendency to repeat itself.

Are you trying to meet your needs or your greed in retirement? Give us a call and schedule an initial consultation with an Oak Harvest Advisor. We will sit down with you and help you and your family do the math to figure out if you will be able to meet your retirement goals and needs.

At Oak harvest, we think our clients are best served by us helping them plan for their future needs, instead of focusing on the past. The future is always uncertain and that’s why our advisors and retirement planning teams, plan for your retirement needs first, and your greed second.

Give us a call to speak to an advisor and let us help you craft a financial plan that helps you meet your retirement goals. Call us here at (877) 896-0040, and schedule an advisor consultation. We are here to help you on your financial journey into and through your retirement years.

– I’m Chris Perras and from everyone here at Oak Harvest Have a blessed week.