On November 8, the mid-term elections will be held in the USA. The mid-term elections are held every four years and the competition in them is not for the seat of the president, but for a third of the 100 seats in the Senate and all 435 seats in the House of Representatives (Congress). Also, 34 of the 50 state governors are up for election, along with a whole series of public office holders. The elections are called midterm elections because they take place two years after the election of the president, in the middle of his term. – In short, these are decisive elections for the continuation of the presidency of President Joe Biden. If the Republicans win the majority of seats, they can paralyze the administration for the next two years. It could also already affect his chances of being elected in 2024. US presidents like to go to elections when the markets are in good shape – this directly affects the mood of Americans and their desire for ‘change’. The latest example is recent : Take even Trump, if it weren’t for the Corona there is a good chance that he would have continued for another 4 years in the White House, to that extent.
This time the elections are taking place in an unusual environment: inflation is at a 40-year high, the markets are in a bear market and fears of a recession in the US never stop hovering. Officially the US is in recession but for now everyone says it is a ‘technical recession’. In any case, when you add OPEC’s oil export cut to the existing equation, you realize that this year’s elections may also be critical for markets and investors. is that so?
Let’s start from the bottom line. The midterm elections, like any other significant event that affects the American economy, is an event that no one can predict the results of, certainly not its future consequences (again we will return to Trump – everyone expected that if he was elected Wall Street would collapse, but after he was elected the stock markets jumped). The point is that as investors we need to be prepared for any scenario – the markets can go up, the markets can fall, yields can fly up and the dollar might even dive. No one knows what will happen and we have to face it. This understanding that no one knows what will happen is probably clear to most investors in the capital market, but often we are nevertheless interested in predictions, which no one can guarantee us that they will come true, Maybe it’s better to look at the past?
Even if the Democratic Biden administration will have to witness Republicans holding the majority of seats in the House of Representatives or the Senate, it will not be the first time that the administration and Congress are two different parties. Of course, the situation weighs heavily on the ability of each of the parties to carry out the promises they made to their voters, but despite this, it seems that the significance for the markets in the long term is not high. In a study by the Edelman company on the performance of the S&P 500 index since 1948, it became clear that No party had a significant impact on the performance of the indices: When the Democratic Party controlled the White House, the Senate and the House of Representatives, the performance of the indices averaged 15.1%, while when the Republican Party was in charge, the return was 15.9%.
In the company’s research, it examined another matter – what would be the return we would earn from investing in the same index if we only invest when a Republican or Democratic president is in office (regardless of which party controls the House of Representatives and the Senate). A $100,000 investment in the index from 1948 to the end of 2021, when only a Republican president is at the top, would have generated $834,000. In the event that we were to invest exactly the same amount but do so only when a Democratic president is in office, the investment would reach $3.7 million by the end of 2021. The difference does seem large and impressive (and without considering all the other reasons that affect Wall Street and can explain better or worse years in the stock market) but the critical point is – If we had let the original investment grow over the years, regardless of who was in power, that original investment would have yielded We have 31.2 million dollars.
The essential point from the company’s research is clear – there is no need to time the market according to the elections. On the contrary, in the long term the matter may even harm us. Of course, there are many investors who prefer to trade stocks or invest for the short term, but this is exactly the point, Diversified long-term investment produces a high return and allows us to take time off from dealing with the daily hustle and bustle of the markets.
Of course, it is difficult to separate politics from us, in the end, even if in the long term it does not have a material effect on the markets, it has an effect on them at this moment and certainly on the lives of the citizens in the United States. Politics takes out many emotions from us and this happens to many people – which will probably lead the markets to a lot of volatility. So it’s true, you can try and bet on who will win, what the impact of each contestant will be and prepare thousands of predictions that will support or contradict our belief. The question is – isn’t it better to rely on the past and the ability of the markets to rise in the long term?
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