The value of the stock market, at any given time, is essentially the price investors collectively are willing to pay for the future earnings of the companies comprising the market. In determining the value of these future earnings, investors consider a plethora of variables, ranging from individual companies’ balance sheets to major geopolitical events. When we encounter periods of heightened volatility in the market it is reflective of atypically high uncertainty over a host of issues.
The market dislikes uncertainty because it makes future earnings harder to predict. One current uncertainty, which will have a definitive timeline for a resolution, is the US mid-term elections in November. Polls indicate that the Republicans will likely take control of the House of Representatives and could also potentially wrest away control of the Senate as well. Whatever happens, the resolution of this uncertainty should help reduce volatility in the markets, as it removes at least one of the many variables from play. Any gains for the Republicans will likely be viewed as a positive by the markets as it could result in political gridlock, which is desirable from an investing standpoint, because it removes the potential for legislative changes that could have negative impact on the markets.
While we can’t predict who wins the elections and we can’t forecast the path of geopolitical events, we can look at the data from past election cycles for clues to how the markets may behave. We have analyzed the past 69 years' worth of S&P 500 monthly returns and grouped them into 4-year Presidential cycles to identify potential patterns in market behavior. If we take the composite seasonal performance of the S&P 500 during the 4-year Presidential cycle, the low point for markets often comes in the 2nd year of an administration’s term. We can see this in the chart below. This would correspond to this year, year two of President Biden’s first term, according to the cycle.