Is the law of history invalid or is the risk late? As the midterm elections approach, how do U.S. stocks cross the “volatile range” in the third quarter?
[Historical laws have failed or is the risk late? As the midterm elections approach, how do U.S. stocks cross the "volatile range" in the third quarter] As the United States moves toward the midterm elections in November, investors are reassessing the potential impact of changes in the power structure in Washington on financial markets and the macroeconomy. Judging from historical experience, the turn of summer and autumn in mid-term election years is often the most vulnerable window for U.S. stocks. According to data from the Teachers Insurance and Annuity Association (TIAA), since 1960, the S&P 500 has fallen an average of 2.6% between May and October in midterm election years, while it has risen 3.1% during the same period in other years. However, since May this year, the S&P 500 has bucked the trend and has risen 2.46%.
As the United States heads toward midterm elections in November, investors are reassessing the potential impact of changes in Washington's power structure on financial markets and the macroeconomy. Judging from historical experience, the turn of summer and autumn in mid-term election years is often the most vulnerable window for U.S. stocks. According to data from the Teachers Insurance and Annuity Association (TIAA), since 1960, the S&P 500 has fallen an average of 2.6% between May and October in midterm election years, while it has risen 3.1% during the same period in other years. However, since May this year, the S&P 500 has bucked the trend and has risen 2.46%. The investment analysis agency NDR reminded in its latest research report that this apparent calm is closer to "complacency" than that election risks have subsided. Sentiment indicators are showing signs consistent with a historically common pullback pattern in the third quarter of the second year of a presidential term, but markets are not yet pricing in a possible second round of weakness between mid-August and October. However, there are also many financial institutions that choose to "see through the noise." Morgan Stanley and BCA Research both said that although the mid-term elections determine the shape of Congress, it is the executive branch that truly leads core policies such as tariffs, diplomacy, and deregulation. Investors may be better served to view the midterm elections as a quantifiable, routine risk rather than a devastating uncertainty. Matt Gertken, chief geopolitical strategist at global investment consulting firm BCA Research, holds this view. "Uncertainty is like the situation in the Strait of Hormuz, which is extremely difficult to measure and may have a dramatic tail impact at any time." Getken said, "The mid-term election is more like an institutionalized conventional risk. Before and after election day, the stock market usually fluctuates. If there are concerns about the Democratic Party's potential tax hike policy, there may be a periodic correction, but the more essential pricing logic of the market is still on the supply side." The relationship between markets and midterm elections Combining the historical four-year cycle pattern with the current trend of the S&P 500, NDR judged that the performance of U.S. stocks from January to February this year was basically in line with the trend of a typical mid-term election year. However, from March to May, it was disturbed by external factors such as the situation in the Middle East and once deviated from the historical track. U.S. stocks have stagnated at high levels in the past seven weeks, which is basically consistent with the "moderate/weak summer rebound" pattern common in midterm election years. The agency further analyzed that the current low market attention to the mid-term elections is mainly due to two reasons: First, market consensus has tended to regard the election results as an "established fact." The Republican Party's majority in the House of Representatives is already weak. Historically, the ruling party almost always loses seats in mid-term elections, and Trump's poll support is not ideal; second, focus events such as the situation in the Middle East, the pace of capital expenditures of technology giants, and the selection of the new chairman of the Federal Reserve continue to attract market attention. However, NDR emphasized in the research report that this logic does not mean that the mid-term elections will not affect the market in the coming months. According to the NDR's deduction, US stocks may usher in a second phase of consolidation between mid-August and October. This is consistent with the pattern of a typical mid-term election year. The market often bottoms out a few weeks before the election (around October), and then launches a strong year-end rebound. The evidence supporting this judgment comes from two dimensions. First, on the sentiment side, NDR's two sentiment indicators have diverged. The "Group Sentiment Survey" indicator that measures mid-term sentiment has continued to be in the "overly optimistic" range since mid-April, but the "Daily Trading Sentiment Comprehensive Index" that measures short-term sentiment is still neutral and not yet overheated. The second is the policy aspect. The agency’s “policy index” used to measure the tightness of monetary, fiscal and exchange rate policies has dropped by 6 percentage points year-on-year, falling right into the tightening range that has historically been negative for the stock market. The main driving factor is the slowdown in the growth rate of actual federal spending. However, the NDR emphasizes that the intensity of this round of tightening should not be exaggerated. Compared with 2022 (the largest policy slowdown in 50 years due to the withdrawal of epidemic stimulus) or 2010 (the withdrawal of crisis relief funds), the current degree of tightening is much milder and closer to a regular consolidation rather than a deep correction or a cyclical bear market. However, the consumption-boosting effect brought by previously higher tax rebates is weakening, and the possibility of potential interest rate hikes by the Federal Reserve may still pose a mild policy resistance before the election.
However, judging from historical experience, the fluctuations surrounding the mid-term elections often pave the way for subsequent strong gains. According to Capital Group statistics, since 1950, the S&P 500 Index has achieved an average return of about 15% in the year after mid-term elections; Fidelity's analysis also shows that within the same historical range, 95% of mid-term elections have recorded gains in the market the following year. The critical time for the midterm elections has arrived Ma Yushu, a strategist at BCA Research, said in an interview with China Business News that July and August are the key time points for this midterm election. "From the perspective of historical experience and voter behavior, summer every year - that is, July and August - is often a decisive watershed. Usually by the end of summer, the vast majority of voters have basically solidified their mental decisions about which party they will ultimately vote for, and the subsequent sprint period is more of a game of inventory," he said. According to the latest survey by the Pew Research Center in July, voters most want congressional candidates to discuss economic issues, with many also specifically mentioning prices and affordability. However, as the November election approaches, neither party has shown a clear advantage on these issues. Currently, Americans are almost evenly divided on which party they approve of most on economic policy, with 37% choosing the Democratic Party and 36% choosing the Republican Party. However, Ariana Salvatore, head of U.S. public policy research at Morgan Stanley, reminded that regardless of the election results, investors should focus on tangible policy changes and sustainable policy lines. "Risk uncertainties related to tariffs and geopolitical events are likely to persist for the remainder of President Trump's term," she said. “Primary results so far appear to suggest that Republicans remain firmly anchored in President Trump, while Democrats continue to debate whether the path to a congressional majority is through the establishment or more radical progressive candidates,” Salvador concluded. “However, we do not believe that the midterm elections will result in a substantial shift in policy direction. Policy vectors that have been driving markets – such as tariffs, geopolitics and deregulation – are likely to continue.” Regarding the future policy path, Ma Yushu added that if the Democratic Party wins both the House of Representatives and the Senate, the White House will reach a deadlock on domestic legislation in the United States, and Trump will rely more on executive power in the fields of tariffs, technology, and national security to advance his agenda. If the Republicans hold on to the Senate, it is more likely that the two parties will constrain each other on domestic policies and intensify internal friction.
However, judging from historical experience, the fluctuations surrounding the mid-term elections often pave the way for subsequent strong gains. According to Capital Group statistics, since 1950, the S&P 500 Index has achieved an average return of about 15% in the year after mid-term elections; Fidelity's analysis also shows that within the same historical range, 95% of mid-term elections have recorded gains in the market the following year. The critical time for the midterm elections has arrived Ma Yushu, a strategist at BCA Research, said in an interview with China Business News that July and August are the key time points for this midterm election. "From the perspective of historical experience and voter behavior, summer every year - that is, July and August - is often a decisive watershed. Usually by the end of summer, the vast majority of voters have basically solidified their mental decisions about which party they will ultimately vote for, and the subsequent sprint period is more of a game of inventory," he said. According to the latest survey by the Pew Research Center in July, voters most want congressional candidates to discuss economic issues, with many also specifically mentioning prices and affordability. However, as the November election approaches, neither party has shown a clear advantage on these issues. Currently, Americans are almost evenly divided on which party they approve of most on economic policy, with 37% choosing the Democratic Party and 36% choosing the Republican Party. However, Ariana Salvatore, head of U.S. public policy research at Morgan Stanley, reminded that regardless of the election results, investors should focus on tangible policy changes and sustainable policy lines. "Risk uncertainties related to tariffs and geopolitical events are likely to persist for the remainder of President Trump's term," she said. “Primary results so far appear to suggest that Republicans remain firmly anchored in President Trump, while Democrats continue to debate whether the path to a congressional majority is through the establishment or more radical progressive candidates,” Salvador concluded. “However, we do not believe that the midterm elections will result in a substantial shift in policy direction. Policy vectors that have been driving markets – such as tariffs, geopolitics and deregulation – are likely to continue.” Regarding the future policy path, Ma Yushu added that if the Democratic Party wins both the House of Representatives and the Senate, the White House will reach a deadlock on domestic legislation in the United States, and Trump will rely more on executive power in the fields of tariffs, technology, and national security to advance his agenda. If the Republicans hold on to the Senate, it is more likely that the two parties will constrain each other on domestic policies and intensify internal friction.