20 Second Advisor: Midterm elections and what they mean for markets

While it can be easy to get distracted by month-to-month or even one-year returns, what really matters for long-term investors is how their wealth grows over longer periods of time.

Exhibit 2 below says a lot. It shows the hypothetical growth of wealth for an investor who put $1 in the S&P 500 Index in January 1926. The chart lays out party control of Congress over time. Here are some observations:

  • Both parties have periods of significant growth and significant declines during their time of majority rule.
  • There does not appear to be a pattern of stronger returns when any specific party is in control of Congress, or when there is mixed control for that matter.
  • Markets have historically continued to provide returns over the long run irrespective of which party is in power at any given time.

EX2

Equity markets can help investors grow their assets, and we believe investing is a long-term endeavor. Trying to make investment decisions based on the outcome of elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely be the result of random luck. At worst, it can lead to costly mistakes. Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, to pursue investment returns.

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