Post-Midterms: What to Look Out For

November 30, 2018  |  Michael Reilly

Markets don’t like uncertainty any more than investors. If you don’t believe me, take a look at your recent brokerage statements! Ouch.

Leading into this year’s midterm elections there was plenty of uncertainty and volatility.

Sure, there’s been concern about rising interest rates and prospects of a full-blown trade war with China…

But the other big question looming over the markets has to do with whether we would end up with a Democratic lead Congress, a Republican lead Congress, or a split Congress.

The election results could determine what, if anything, gets done on capitol hill for the next two years.

Thankfully, the midterm elections are officially behind us and Congress is beginning to take shape.

And with the polls now closed, we have our answer. Drum roll please…… It’s a split Congress.

So what does that mean for investors?

Well, there are six possible combinations of political alignment between the White House, the House of Representatives, and the Senate.

And historically, each combination has resulted in varying market returns.

This years election results – that have lead to a split Congress, has neither produced the best nor the worse possible annual returns.

So, lets just call it a kind of a “glass half full” thing!

According to The Stock Trader’s Almanac, since 1949 through the end of 2017, under a Republican President and a split Congress, the Dow Jones Industrial Average (DJIA) has averaged annual gains of 6.7%.

As can be seen in the chart above, since 1949 the worst combination for DJIA performance was a Republican President and full Democratic control of Congress, which lead to annual average gains of just 4.9%.

The last time we had a Republican President with a Split Congress comprised of a Democratic House and a Republican Senate was during Ronald Reagan’s first six years in office.

And if anyone (besides me) remembers that far back, when Reagan began his term the stock markets topped in 1981 and proceeded to drop to bear market levels, mercifully ending with a market bottom in August 1982.

I think Congress today would do well to reflect back on that era, as President Reagan and then sitting Speaker of the House, Tip O’Neill, in spite of their party affiliations, worked on legislation and various policies that helped pave the way for the last great bull market and economic boom.

During the six years from 1981 – 1986 the DJIA averaged 12.9% annually.

It happened again during the Clinton administration, when President Clinton lost Congress in his first midterm election in 1994.

Then it was new Republican Speaker Newt Gingrich and Clinton working together despite their many differences of opinion and ideology.

So, the point here is that a split Congress doesn’t necessarily mean that our current bull market will wither and die. There’s historical precedence to the contrary.  

What to do now…

The answer to that is easy. Stick to your rules. Have a game plan if the bull market reignites and prices once again move higher.  Have an alternative, more defensive plan in the event the stock market moves from a typical correction to a full-on bear. And let the same relative strength indicators that have helped successfully navigated previous markets guide your investment thesis today.

If you don’t already have a plan for these kind of market conditions and you’re a qualified investor with a portfolio of at least $500,000 you might want to consider scheduling a consultation with an advisor from Rowe Wealth.

Qualified investors are eligible to receive a completely free portfolio assessment using our cutting-edge risk assessment and stress-testing software. This will allow us to test your portfolio to see how it would fair under various historic conditions, including the ones discussed above. If you don’t like what you see, we’d be more than happy to discuss how you might re-balance to improve your outlook.

Click here now to see available appointment times.

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