When Bad Turns Good – Mid-Term Election Year Stock Market Performance
Midterm election years tend to be the weakest of all in the 4 years of the Presidential cycle for the US stock market as you can see in the 115 year chart below.
Zooming in on the midterm election cycle year details in the chart below, we see they are marked by a stock market peak in the spring and followed by a yearly low in the fall.
Since 1913, on average, the DJIA has fallen more than 20% from the post-election year high to the midterm election (subsequent) year low. So far the major US stock market indices have pulled back 10% or so earlier this year falling short of the historical average. Assuming 2018 follows a similar path of the past, it appears like we have not likely seen the end of this pullback. Keep that in mind if we get additional selling pressure and probe lower in the coming months.
What makes this interesting as investors is that since 1914, on average, the DJIA has subsequently gained more than 47% from the midterm election year low to its high the following year. Obviously, the only way to capitalize on this historical opportunity is to insure you have dry investment powder and a plan for whenever it may materialize.
I probably don’t need to remind everyone but the numbers above are based purely on what the historical averages suggest could occur, not will occur. As such there is risk in following a strategy even though it provides a historically higher statistical outcome.