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After the Midterms: What to Expect from the Markets

November 8, 2018

IT’S NATURAL FOR INVESTORS TO WONDER how the markets might react to the new congressional landscape. For insights, we turned to Niladri Mukherjee, head of portfolio strategy for the Chief Investment Office in Bank of America’s Global Wealth and Investment Management division.

“Typically, midterm election years are quite volatile from a historical perspective,” says Mukherjee. “And that has certainly proven true this year. But, for disciplined investors, volatility can also create new investment opportunities.” In the Q&A below, he shares more insights.

 

 

Q: How have past midterms influenced the markets?

A: “If you look at the past 10 presidential cycles, the S&P 500 Index has experienced corrections averaging about 15% during a midterm election year.1 However, historically, the rebounds that have followed over the next 12 months have helped the market snap back and brought about increased stability. The bounce back generally has averaged about 28% over the year following a midterm.1

 

"Also worth considering, while gridlock in Washington may not be conducive to policy making, the markets have generally done well during such times. For example, under a Republican president, a split Congress has produced the best outcome, with the S&P 500 yielding an average annual return of 12%, since 1928.2

 

Under a Republican president, a split Congress has produced the best outcome, with the S&P 500 yielding an average annual return of 12%, since 1928.2 —Niladri Mukherjee, head of portfolio strategy for the Chief Investment Office in Bank of America’s Global Wealth and Investment Management division

Q: What is it about the midterms that causes volatility?

A: “One of the main reasons may be that more populist and less market-friendly policies are often pursued leading up to midterm elections. In the current environment, that would include the potential for additional regulation impacting the tech sector and the escalation of trade tensions with China. But while these issues may vary with each midterm election cycle, the behavior of the market tends to follow a fairly consistent pattern, resulting in a period of stability following the midterms. As it turns out, historically, the third year of a presidential cycle is usually the strongest in terms of market performance.3

 

Q: Are there any trends today that we haven’t seen in other midterm election cycles?

A: "Right now, the U.S. economy is in the midst of transitioning to an environment of higher growth along with higher interest rates and moderate but higher levels of inflation. So in addition to any uncertainty coming from Washington, we have this economic shift driving higher volatility in global financial assets. At times like these, investors can become risk-averse and make the mistake of deviating from their long-term asset allocation plans.”

 

Q: Should investors consider adjusting their strategy after the midterms?

A: “The most important thing is not to develop an investment strategy based purely on the midterm elections. Rather, focus on the fundamentals, such as economic growth, corporate profits and valuation levels. Look at where there are opportunities and where there are risks, and make sure your portfolios are diversified across different asset classes and across all segments of the market. Determine what’s important to you and use those insights to make decisions moving forward.

 

"This is definitely a time to reach out to your financial advisor with questions. She or he can help you understand your choices and work with you to help keep your goals on track."

 

For more insights from the Chief Investment Office, read Divided Government: Taking Stock of the Midterm Election. And visit our Washington Update page for ongoing coverage.

1 Strategas Research Partners. Data as of 2018.

2 S&P, FactSet, BofA Merrill Lynch Global Research US Equity & US Quant Strategy

3 Chief Investment Office, “Investment Strategy Overview,” October 2018.

 

Past performance is not a guarantee of future results.

 

Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

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